- The S&P 500 is down 16.7% since the start of 2022.
- But the market likely hasn’t bottomed, according to Peter Boockvar.
- Boockvar thinks investor sentiment is still too high, and a wave of capitulation is coming.
Over the last few months, there’s been a shift in the market’s paradigm.
Good labor market news was bad news for investors in the first few quarters of 2022, because it meant that the Federal Reserve would be at liberty to continue to aggressively tighten policy.
But as the Fed has continued to ratchet up interest rates, good economic news has again become good news to the market. That’s because the economy is proving to be resilient despite the Fed trying to slow it down, and with inflation beginning to fall meaningfully, the Fed appears to be nearing the end of its tightening cycle.
Investors are starting to believe that a soft landing scenario could very well play out. As such, the S&P 500 is up 10% since its October 12 bottom.
But market participants shouldn’t be too optimistic that a true bottom to the bear market is in, according to Peter Boockvar.
Boockvar, the CIO at Bleakley Advisory Group with 30 years of market experience, said in recent interviews with CNBC and Wealthion that he thinks investors wrongly believe that the Fed will pivot in the third quarter this year, and that the central bank will instead keep rates elevated through the end of the year.
As time goes on, this will weigh on economic growth, he said, and lead to a decline in earnings that the market isn’t pricing in currently.
“I still hear people saying, yeah, 17x is the right multiple in this market. And I just don’t see that’s where we end up, both because I think that’s still high historically speaking and especially in in the face of this dramatic move in interest rates, but also, you know, the pendulum doesn’t just swing and when it gets extreme in one direction just come back the other way and stop in the middle,” Boockvar told Wealthion, a YouTube channel.
He continued: “It only goes the other way. So I think a multiple of 12, 13x is where we’re going to settle out at.”
In line with his views of where earnings are headed, and currently dislocated expectations for them, Boockvar also thinks a higher level of capitulation needs to set in before stocks can put in a sustainable bottom. Right now, investors are still too eager to get back into the market, he said.
“The third phase of the bear market is everyone throws in the towel, and no one wants to own a stock again,” he told Wealthion. “And as long as you still have people that want to buy the dip, as long as you have people that think okay once the Fed’s done raising interest rates and inflation rolls over, everything’s fine — that doesn’t end bear markets. Bear markets end with outright disgust.”
Boockvar didn’t give a specific timeline for when he expects this capitulation to set in, but he said the market isn’t close to that point yet.
Boockvar’s views in context
Boockvar’s opinion that investors are too bullish on earnings is shared by some Wall Street strategists.
Here’s Morgan Stanley’s Chief US Equity Strategist Mike Wilson, who also thinks the market will see downward pressure thanks to earnings over-estimations, in a January 17 note: “The spread between our earnings model and consensus forecasts is nearly as wide as it’s ever been and suggests a drawdown in stocks for which most are not prepared. The main culprit is the elevated and volatile inflationary environment which is likely to play havoc with profitability.”
Below is the earnings model Wilson mentions.
And a chart showing Wilson’s rationale on declining profit margins amid high inflation.
Wilson sees the S&P 500 bottoming in a range between 3,000-3,300.
Goldman Sach’s David Kostin, who is more bullish than Wilson in the near-term, assuming a recession doesn’t play out, also thinks earnings expectations are too high.
“We expect further downward revisions to consensus 2023 EPS forecasts,” he said in note earlier this month. If a recession does play out, however, Kostin sees the S&P 500 falling to 3,150.
When it comes to Boockvar’s outlook on market sentiment, indicators show a rebound in confidence in recent months, which has fueled the rally.
Below are two charts of Bank of America’s Bull and Bear Indicator, which shows sentiment has risen back into more neutral territory.
If the economy continues to show resilience in job growth and consumer spending, the October lows could prove to be as low as stocks fall in the coming months.
But, as Boockvar notes, the longer the Fed keeps interest rates elevated against investor expectations — especially after a historically long period of low rates — the greater the risk becomes of the economy slowing and stocks plunging to new lows.