A week ago, Wall Street’s best minds took a hard look at the market and determined that the S&P 500 is going to be 18% higher a year from now. Since then, those same stocks have dropped another 5% . . . so has the world gotten that much worse in the last five days?
They’re still the same companies. FedEx (FDX) has gone back on its guidance but it’s “only” a $40 billion stock, roughly 1/1000 of the S&P 500 by weight. As long as its struggle is relatively localized and contagion remains minimal, the world continues on roughly the same track.
Earnings targets for next year haven’t shifted beyond a rounding error across the market as a whole. As far as any of those great minds are concerned, the problems FDX is facing are largely limited to that company.
And that means the market that looked 18% undervalued last week is now poised to rally 20-25% in the next 12 months. That’s normally a great paycheck for a one-year holding period when you consider that in the long run the S&P 500 needs twice that much time to deliver that kind of return.
Maybe all the targets are overly optimistic. Even in that case, we’d need to see at least a 10% earnings decline in the coming year to make stocks look overvalued. The odds of all the best minds being that far off reality . . . basically missing a crash on the horizon . . . are on the slim side.
They do their homework. They don’t want to be that far off. They monitor the business climate around their companies, talk to management and customers, avidly consume third-party data. And then they do the math.
The math still points to 8% earnings growth next year. If a 10% decline awaits us instead, all the math that’s worked reasonably well has suddenly broken.
It can happen. The estimates flipped from 2% growth to a 14% decline back in 2020, but that big swing to the downside required universal lockdowns in the face of a global pandemic.
Has the Fed engineered that kind of disaster? If so, we know how fast the Fed can pivot to fend off total economic apocalypse. They’ll do it again.
And if that level of catastrophe isn’t brewing now, the earnings targets aren’t actually going to be that far off the mark. Maybe a point or two of growth evaporates if the Fed pushes too hard. That’s it.
Even in that world, stocks are still cheap. They’ll be worth 15-20% more if you hang on for a year. For all we know, the targets are actually a little on the low side and stocks can support an even bigger bull run.
But either way, there’s no sell signal here and not even a hold signal. This is the kind of dip that’s worth buying as long as you’re willing to look a year out.
Investors aren’t looking a year out right now. That’s what this weird lack of bargain buying tells me. The stocks still look fairly robust. Corporate America is holding up against the drag of inflation and interest rates relatively well.
What’s failing here is your fellow investors’ nerve. That’s their problem. Buy the market and hold on for a year and you’ll probably make money.
If not, the Fed will need to reconsider its course. And that’s constructive for stocks too.