Leuthold Worst Case Has S&P 500 Overshooting Its Historic Floor

image

(Bloomberg) — Downward spiraling stocks are showing no signs of finding a floor. Brace yourself, because at least one forecasting framework says the bottom may still be a ways away.

That’s an interpretation of data compiled by Leuthold Group, using a particularly bloodless standard of analysis that focuses not on investor psychology or positioning but strictly reversions to the valuation floors of past selloffs. In this historical lens, the Minnesota-based money manager sees precedent for an additional drop in the S&P 500 of between 11% and 32%.

Troubled times give voice to pessimists, and Leuthold’s downside studies are famously brutal, accentuating worst-case scenarios from past eras when investor faith was tried mightily. With the S&P 500 down 2% or 3% in four of the last six days, on the other hand, the time for a sober reckoning — however difficult — may have arrived.

“A secular bear market can drop well below the median valuation level,” Paula Mikl, senior vice president at Leuthold, said by phone. “If that happened to be the case, like 1973, 1974, or 2007 to 2009, there was significantly more downside.”

One of the reasons Leuthold’s model is still flashing downside is that it is based on valuation, a particular problem in today’s market, despite relentless selling pressure that is battering investors daily. Monetary stimulus and government spending last year sent the S&P 500 and Nasdaq Composite to levels relative to earnings and sales with few precedents since the dot-com bubble of the late 1990s.

Applying a suite of valuation metrics that compare shares prices to things like earnings, dividends and cash flows, Leuthold found that even after a decline of more than 20%, the S&P 500 still looks stretched when stacked against the historic norm. Against levels more common with the bottom of big selloffs, the picture gets uglier.

To be sure, no one can predict with confidence the proper multiples that shares can fetch. But in today’s market, when the Federal Reserve is raising interest rates at the most aggressive pace in decades to tame red-hot inflation, and the growth outlook gets murkier with the pandemic and war lingering, a case can be made that the current multiple contraction has a chance of overshooting on the downside.

To account for that — basically to account for the fact that the S&P 500 is now in a bear market — Leuthold calculates the distance to a somewhat depressed historical valuation: the 25th percentile, to be exact. Based on that since 1957, the S&P 500’s implied level today is around 2,478. That represents a 32% drop from where it closed Thursday. Updated for a shorter interval — one that begins in 1995, a period of higher multiples and higher returns on intangible assets — the fall would be about 11%.

Already, the market has endured one of the fastest valuation contractions in history. After peaking above 30 times earnings a year ago, the S&P 500’s multiple shrunk by 43% — almost matching the size of the contraction during the entire 2000-2002 crash.

Brian Bost, co-head of equity derivatives in the Americas at Barclays Plc, is cautious, given a flurry of headwinds weighing on the market, from inflation to a hawkish Fed and geopolitical tensions.

“It’s the culmination of all those that’s creating a little bit of a storm that is much more complex than just one asset bubble popping,” Bost said by phone, referring to a broad selloff across assets from bonds to cryptocurrencies. “In order for things to get better, they definitely have to get worse first.”

©2022 Bloomberg L.P.

Trending Ideas

Featured Stocks On The Move

Daily Rundown
  • Restaurants, Streaming, Software, Retail

    Brinker International, Inc. (EAT) Brinker International, Inc. operates popular restaurant chains, including Chili’s Grill & Bar and Maggiano’s Little Italy. The company focuses on providing value-driven dining experiences and maintaining... Read More

  • Banking, Footwear, SPAC, Leisure Travel

    Barclays PLC (BCS) Barclays PLC is a multinational investment bank and financial services company headquartered in the UK. The firm offers a wide range of services, including retail banking, wealth... Read More

  • Fintech, Aviation, Consumer Goods, Fintech

    Robinhood Markets, Inc. (HOOD) Robinhood Markets, Inc. is a financial technology company revolutionizing investment with its commission-free trading platform. It provides tools for trading stocks, ETFs, and cryptocurrencies, making financial... Read More

  • Mining, Networking, Banking, Energy

    Kinross Gold Corporation (KGC) Kinross Gold Corporation is a senior gold mining company with operations and projects across the Americas, West Africa, and Russia. The company focuses on delivering value... Read More

  • Fintech, Telecommunications, Mining, Industrial Supplies

    360 DigiTech, Inc. (QFIN) 360 DigiTech, Inc. is a leading fintech platform in China, offering consumer credit solutions and financial advisory services. The company leverages big data and artificial intelligence... Read More

  • Banking, Healthcare, Technology, Retail

    Triumph Bancorp, Inc. (TCBX) Triumph Bancorp, Inc. provides banking and financial solutions, specializing in transportation-focused lending and factoring services. The company leverages technology to streamline operations and enhance customer experience... Read More

  • Investment, Precious Metals, Financing, Asset Management

    Invesco Ltd. (IVZ) Invesco Ltd. is a global investment management company offering a variety of financial products, including ETFs, mutual funds, and retirement solutions. The firm emphasizes innovation and expertise... Read More

  • Manufacturing, Technology, Fintech, Social Networking

    Modine Manufacturing Company (MOD) Modine Manufacturing Company specializes in thermal management systems for automotive, HVAC, and industrial applications. The company focuses on energy-efficient solutions to meet sustainability and performance demands.... Read More



Top 3 Stocks in Leading Sectors
  • 3 Electric Power Stocks To Buy Now

    Empresa Distribuidora y Comercializadora Norte S.A. (EDN) Empresa Distribuidora y Comercializadora Norte S.A. (EDN) distributes electricity to Argentina’s Buenos Aires region. The company focuses on reliable energy supply, infrastructure upgrades,... Read More

  • 3 Investment Brokerage Stocks To Buy Now

    Robinhood Markets, Inc. (HOOD) Robinhood Markets, Inc. operates a financial services platform offering commission-free trading in stocks, ETFs, and cryptocurrencies. Known for its user-friendly mobile app, the company focuses on... Read More

  • 3 Consumer Service Stocks To Buy Now

    FAT Brands Inc. (FAT) FAT Brands Inc. is a global franchising company that develops and manages a portfolio of fast-casual and casual dining restaurant brands. Known for its diverse offerings,... Read More

  • 3 Safety Stocks To Buy Now

    Digimarc Corporation (DMRC) Digimarc Corporation develops innovative digital watermarking and content identification technologies. Its solutions enhance product packaging, digital media, and supply chain transparency, providing companies with tools for brand... Read More

  • 3 Gold Stocks To Buy Now

    Royal Gold, Inc. (RGLD) Royal Gold, Inc. acquires royalties and streaming interests in precious metal mines, focusing on gold, silver, and copper. The company benefits from rising commodity prices without... Read More

  • 3 Aerospace/Defense Stocks To Buy Now

    OSI Systems, Inc. (OSIS) OSI Systems, Inc. specializes in designing and manufacturing electronic systems for security and healthcare applications. The company provides advanced screening, imaging, and critical care monitoring solutions... Read More

  • 3 Airline Stocks To Buy Now

    JetBlue Airways Corporation (JBLU) JetBlue Airways Corporation is a low-cost airline that provides flights to destinations across the United States, the Caribbean, and Latin America. Known for its customer-focused service,... Read More

  • 3 Tobacco Stocks To Buy Now

    Turning Point Brands, Inc. (TPB) Turning Point Brands, Inc. markets and distributes a range of branded consumer products, including Zig-Zag rolling papers and Stoker’s moist snuff. The company operates within... Read More