Why the Bear Market May Not Be Over Anytime Soon

Why the Bear Market May Not Be Over Anytime Soon

Are investors better off waiting until next year to buy stocks?

As of the end of last week, the S&P 500 and the Nasdaq were down 24% and 32%, respectively. Concerns of a possible recession combined with rising interest rates, inflation, supply chain issues, and a war in Ukraine are some of the main reasons the markets have faced a tough year in 2022.

But even though the markets have tanked so much already, investors should be careful not to assume that the worst is over. Here are a couple of reasons why the markets could still be struggling in the months ahead. Earnings estimates remain high

A big problem I’m seeing with some stocks is that, although investors are concerned about a recession being on the way, that isn’t reflected in analysts’ earnings estimates. Forward price-to-earnings (P/E) multiples are based on analyst expectations for how a business will perform next year. And if a recession is coming, then it would stand to reason that forward P/E multiples should look worse than the trailing ones (i.e., how the company has been performing over the past 12 months).

But this isn’t the case: The S&P 500 currently averages a trailing P/E of 18, but based on estimates for the next 12 months, its forward P/E is just over 16. That suggests analysts expect, on average, for stocks in the S&P 500 to generate better earnings in the future than they are now. An adjustment to these expectations is overdue, and once analysts update their estimates, which could happen after the next earnings season, it could trigger another sell-off . Many households are still holding lots of money in equities

Another factor that looks to be still positively impacting the stock market is that more people are invested in stocks than is normally the case. Retail investors have been piling into stocks since the start of the pandemic. Not only were there a lack of entertainment options amid lockdowns in 2020, but stimulus payments combined with a freeze on student loan repayments put people in better financial positions, and thus, many of them began buying stocks.

According to Goldman Sachs , equities account for 39% of the assets that U.S. households have right now. That remains near record levels (in the 96th percentile). The investment bank projects that next year, under challenging economic conditions and potentially higher unemployment, there could be many people pulling money out of the stock market; the bank expects households will sell up to $100 billion in stocks. That’s a lot of money coming out of the market, meaning that there could be more bearish activity on the way, and some stocks could become even cheaper than they are at present. Many quality stocks are available right now

There are already many attractive stocks to buy in the market today. In healthcare, where the pandemic disrupted regular day-to-day operations at hospitals, for example, there could be some underrated investments.

Shares of pharmaceutical giant and medical device maker Johnson & Johnson ( JNJ 1.51%) are down a relatively modest 6% this year, but this top healthcare stock remains close to its 52-week low. Its P/E over the past 12 months is 23 (the healthcare average is around 20), but this is a company that should perform better as the healthcare industry returns to normal. Plus, with the business spinning off its consumer health unit, which is the source of many legal headaches for the company and not a whole lot of growth, it has the potential to become a much better buy in the future. It’s also a Dividend King , raising its dividend payments for 60 years in a row.

Then there’s Abbott Laboratories ( ABT 2.87%), which voluntarily issued recalls on its baby formula products earlier this year. The bad press and underwhelming results due to that led to its shares crashing 28% so far this year. But this is still a largely diversified company that makes medical devices, sells nutritional products and pharmaceuticals, and provides diagnostics. It’s also a Dividend King and makes for an attractive long-term investment. Its trailing P/E of 22 should also improve next year. Should you wait to buy stocks?

The deals in the stock market today could become better ones if the markets crash even more. But that isn’t a guarantee, as some beaten-down stocks may have already reached a bottom. The point here is that some stocks, especially those with optimistic forecasts, could remain vulnerable and due for steeper declines in value.

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