Reasons are accumulating to feel vertigo in the stock markets despite the display of prudence with which Jerome Powell, president of the Federal Reserve (Fed) , managed to keep the market’s nerves tempered at the meeting of central bankers in Jackson Hole , influencing a cautious and gradual withdrawal of stimuli (tapering) that guarantees that any attempt of lack of liquidity will be avoided or that a tightening of financing conditions will be prevented from stifling the economic recovery, as the European Central Bank (ECB) has also been defending in this stage of reconstruction after the pandemic.
Wall Street indices are trading at all-time highs, and specifically the S&P 500 does so at a PER (times that the profits of companies are reflected in share prices) above 22 times if the reference is made to joint earnings estimate for 2021 and above 20 times if 2022 is assumed. The threat is that since 1940, the average performance of the S&P 500 in the year after exceeding a PER of 20 times is slightly negative, according to calculates Citi (see chart).
This statistic supports other overbought warnings, and the technical scenario of an upcoming correction to alleviate it that is defended in Ecotrader : the exchanges could be left with a “last bullish lash”, as described by Carlos Almarza, advisor to the investment strategies portal of elEconomista, but the current return / risk equation presented by the indices is very unattractive, with a path limited to just 3% for both the S&P 500 or the Nasdaq technology and for the EuroStoxx <: SX5T.ST:> 50.
Meanwhile, the risk of falling of these references is up to 7%, with first supports at the July lows, such as the 14,450 points of the Nasdaq 100, the 4,235 of the S&P 500 or the 4,030 integers of the EuroStoxx 50, where Carlos Almarza considers that “buyer interest will most likely appear and from where in Ecotrader we would already begin to consider taking new positions.”
“As long as there is no closer approximation to the July lows that offers us a more attractive return / risk equation, operationally, we would not move too much,” continues the expert in technical analysis. “Our recommendation is to wait patiently, especially when the route on Wall Street could already be very limited in the short term,” he concludes.
Citi uses another metric from a fundamental point of view to warn of the risk of correction on Wall Street. According to the PER to which the S&P 500 is traded after climbing close to 100% from the ground in March 2020, after the Covid-crash, the sentiment attributed by the investment firm is one of euphoria, under which in 75% of the Sometimes the index falls in the following year, and it does so by 8.7% on average.
The overbought coincides with a slowdown in the recovery, reflected in leading indicators such as the PMIs for China , the United States and, to a lesser extent, the euro area, which is dragging a more delayed cycle, and also the economic surprise indices, which reflect the In recent days, more data have disappointed expectations than those that have met or improved them in the main economic poles of the world, happening in China for months.
“The key question is how much of the slowdown is temporary and how much is due to the inevitable normalization of growth rates as momentum to reopen fades,” warns BofA’s team of analysts. The slowdown also has to do with the incidence of the Delta variant of Covid at the local and global level, geopolitical tensions in the face of the complicated situation that Afghanistan is going through and the shortage of intermediate goods, supply problems and the semiconductor crisis, which is affecting important industries such as automotive.
“In the current environment, where there are increasing reasons for uncertainty, such as the loss of economic momentum due to the new global wave of infections by the Delta variant of the coronavirus, corporate profits have so far been a piece of solid ground in in the midst of the storm, “observes Stefan Rondorf, a strategist at Allianz Global Investors.