Market volatility and a rapidly changing macroeconomic landscape have clouded metrics that investors typically use to value stocks
Whipsawing bond yields, surging oil prices and a Federal Reserve bent on squashing the worst inflation in four decades are hampering investors’ ability to assess U.S. stock valuations, even as the market’s tumble creates potential bargains. Without a doubt, stocks are far cheaper than at the start of the year, following a 23% year-to-date decline in the that confirmed a bear market for the index earlier this week. Whether they are cheap enough, however, is less certain. Market volatility and a rapidly changing macroeconomic landscape have clouded metrics that investors typically use to value stocks, such as corporate earnings and Treasury yields, keeping some potential buyers on the sideline.
“Until we see some better visibility on the rates outlook and some better visibility on the earnings outlook, the fair value for equities is a little bit elusive”, said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. The institute recently started recommending clients reduce equity risk and move funds into fixed income. Stocks came under more pressure this week, with the falling to its lowest since late 2020, in the wake of the Fed enacting its largest rate-hike in nearly three decades. This year’s decline lowered the index’s forward price-to-earnings ratio, which compares its price with its expected profits, to 17.
