September 26, 2022
Policy: The S&P 500 (SPX) has lost ~5.3% since the September Fed policy statement and press conference where Powell mentioned ‘pain’ six times. Looking only at the updated dot plot, we can expect the rate hikes to end in January at 4.50% Fed funds (now 3.25%) and remaining at that level throughout ’23. Expectations for rate hikes to end in January should begin to slow the ‘get it while you can’ impulse that’s partially to blame for the elevated August CPI print.
Valuation: The bottoms-up consensus 2023 SPX EPS estimate now sits at $243. Using current levels and assuming a post-Q3 deterioration to $240 gives you a 15.2x forward earnings multiple. Valuation is a poor indicator for market timing, but the SPX can no longer be described as ‘overvalued’ with the forward multiple now below its long-term average of ~16.1x.
SPX: The SPX is currently trading below its cycle low close of 3667 with multiple technical indicators now back to deeply oversold territory. The same oversold levels in June preceded the two-month long +17% rebound rally to mid-August. Unfortunately, Friday’s close failed to reveal the type of momentum deceleration and dispersion we saw two days prior to the 6/21 reversal, but it’s coming. Friday’s UK stimulus proposal is the driver of further upside in bind yields/downside in equities and a surprise inter-meeting BOE rate hike remains the identifiable upside risk. Strong technical support sits in the 3500 handles, but with deeply oversold conditions, extreme bearish sentiment and light equity positioning (CTA positioning back to June lows) every downtick compresses the spring further, which ultimately leads to a sharp rebound.