Investors worried about the next pullback for stocks might want to pause and consider this: the decline in equity valuations since the start of the year already has exceeded the average pullback of other recessionary periods since the early 1990s, according to JPMorgan Chase & Co.’s equity quant Marko Kolanovic. While more Wall Street analysts have been painting a grim picture of the trajectory of corporate profits this year, Kolanovic, who successfully called the summer stock-market rebound, said investors might be pricing in too dire of an outcome for stocks, even if the American economy falters.
Instead, U.S. equity valuations already were seeing a dramatic re-rating lower, even by the standard of a typical recession, he argued, in a Monday research note. As part of his bullish argument, Kolanovic looked at the next-twelve months (NTM) price-to-earnings ratio — perhaps the most popular ratio used to express equity valuations — and found that it exceeded the average pullback in recessionary periods over the past 30 years.
Kolanovic also found that this year’s pullback would be the second-biggest to follow a recession, should one be declared. To be sure, valuations (using NTM earnings expectations as the denominator) occasionally have been lower, like when stocks bottomed in March 2020 in response to the COVID pandemic. During said pullback, the S&P 500’s NTM price-to-earnings multiple bottomed out around 15.5x, marking a drop of nearly 7x (see chart) from its January peak. By comparison, in March 2020 the S&P 500’s NTM price-to-earnings ratio hit a low of 13x. The findings would seem to support Kolanovic’s view that U.S. stocks already priced in a mild recession. His analysis comes after the busiest week of the second-quarter earnings season, with corporate performance holding up surprisingly well considering the U.S. economy has contracted now for two consecutive quarters.
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