The simple truth right now on the stock market? It's just not that cheap.
At first blush, it would seem as if a compelling buying opportunity has surfaced. Since hitting new highs last May, the S&P 500 is down nearly 12%, eclipsing the 10% threshold that signifies a market correction for the second time in less than six months. What that means in English: a global company likely sitting on a ton of cash and boasting a reasonable chance of boosting profit margins in 2016 is 12% cheaper to buy.
On down days, all sectors of the market are getting hit, suggesting investors are panicking and dumping shares on worrisome headlines rather than a rational outlook for profits. In the past, that would hint at the emergence of buying opportunities in best-of-breed names. However, the market is selling off too quickly to justify pulling the trigger on, say, a top quality stock such as Action Alerts PLUS charity portfolio holding Starbucks (SBUX), which is getting lost in the confusion.
The sensitivity to the slightest of bad news is running high, too. A company that handily beats on earnings such as restaurant operator Brinker International (EAT) did on Wednesday got hammered. When earnings beats from U.S. focused companies don't propel a stock, that's a problem. After all, the last thing keeping many in this market is the accelerating job growth logged in the back half of 2015 and what it should mean to profits for U.S. companies.
Meantime, shares of The Container Store (TCS) nosedived on Tuesday, following comments its CEO made to TheStreet's Carleton English and I at an event on Monday. "Well, if we keep seeing 300-point down days in the markets, then I don't know," said Kip Tindell on whether the U.S. was headed toward a recession. Well, we have gotten a few more of those down days, Mr. Tindell -- so are we headed toward a recession that stunts the demand for pretty cool plastic containers? Who knows, but the market doesn't like to hear the possibility of a recession from a well-known CEO such as Tindell.
In the end, all of the wild swings in the market lead to one conclusion: Valuations have to come in further, given the state of the global economy. The state of the global economy is such that profit estimates for S&P companies have unlikely bottomed. As the chart from RBC points out below, profit estimates for S&P 500 companies continue to fall. Until there is stabilization, it's unlikely stocks rebound with any consistency. So yes, the rally from the lows on Wednesday was likely a head-fake.
And until we get that stabilization in estimates, the valuation of stocks could continue at unattractive levels, despite being reined in to begin the year. As the chart below from Bloomberg shows, valuations are still at levels that depict generally solid earnings outlooks for companies, made so by accelerating growth in China and other emerging markets (see period from mid-2013 to 2015).
Further, valuations at current levels unlikely show the impact of an interest rate hiking Federal Reserve -- that is something the market is trying to price in as we speak.