Experts say that the US equity market rallied in the second half of August. Notably, the stocks included in the S&P 500 sharply rose in value. However, the rapid rally brought investors losses because the S&P 500 reached the overbought territory. Under such market conditions, analysts lowered earnings estimates for companies in the S&P 500 for both 2022 and 2023.
When the US stock market printed new lows in mid-June, experts increased the forecast of the price-to-earnings ratio (P/E) of the S&P 500 stocks for the full 2022 to 18.9 points. Earlier, the consensus was 16 points. This gap in forecasts is viewed by experts as a considerable revision for such a short while. In this context, the S&P 500 stocks entered the overbought territory. For the time being, such shares are overvalued.
Meanwhile, the spread between stock yields and yields of 10-year Treasuries is measured at 2.37%. Previously, the same score was recorded in the autumn of 2018. The figure dipped below this level only in April 2022. Wall Street went through a serious downturn in both cases.
On August 24, analysts downgraded the forecast for aggregate profits of the S&P 500 by 3.4% to $226.65 per share. Notably, the stocks listed in the S&P 500 peaked in August and traded at $230.02 per share on average. The preliminary forecast for the S&P 500’s gains is gloomy also for 2023. Profits of the S&P 500 companies are expected to decline by 2.5% to $243.92 apiece. Experts warn about a protracted downtrend, though with a minor decline.
The S&P 500 has been stuck at overbought levels because investors are discouraged by fading would-be profits amid the Federal Reserve’s policy of aggressive monetary tightening. The index found some support from the ongoing rally as the market has partially recouped heavy losses. Nevertheless, there is a slim chance for a bull market on Wall Street as the US central bank will hardly soften the pace of sharp rate hikes.
Although the S&P 500 is currently overbought, the situation may change anytime. Fundamental factors may again set the tone for the stock market. For this reason, the price-to-earnings ratio (P/E) of the S&P 500 could sink to the average value of 17.4 points or tumble to June’s low of 16 points. A fall in the P/E is realistic on the back of the current economic havoc and hawkish monetary policies pursued by major central banks.
For the time being, experts say there is a fifty-fifty chance that the S&P 500 will develop a steady rally or fall prey to negative fundamentals. Therefore, Wall Street is set to trade with high volatility, experts conclude.
