March 1, 2023
Short-term support is in focus as the global disinflation cycle is challenged by recent hotter-than-expected inflation data including US ISM as well as German, France and Spain CPI.
Valuation: The S&P 500 trades at 17.8x consensus calendar year EPS estimates. Valuation is a poor market timing tool, but the historical mean is more like 15x when 10-year real yields are in this range. Yesterday, we discussed the disconnect between recently resiliency equity markets in the face of sharply higher short-term bond yields. That disconnect is beginning to show in a simple valuation comparison between 10-year Treasury yields and the earnings yield of the SPX. A higher earnings yield on stocks over bonds is supposed to compensate the investor for taking added risk. Over the last 18 months, the spread between the S&P earnings yield and 10-year yield has narrowed to ~160bps from ~650bps.
Near-term: Ten-year yields are now at the upper-end of technical resistance in the 3.80 range as the SPX reaches short-term oversold levels. We expect 10-year yields will mean revert in the near-term, which should help the SPX maintain levels just above its 200-day moving average at ~3940. The 200-day moving average is a popular trading trigger among CTAs and other systematic funds. A sustained break could add as much as $50B in incremental selling volume and threaten next level support at 3880.