Investors can't be blamed for feeling a little better about things these days. Especially when compared with where the S&P 500 was two short weeks ago. If my calculator is correct, the venerable blue-chip index is up +9.3% from the intraday panic low seen on April 7th. And while the market is only 6% above the closing low of this move, the volatility does seem to be a bit more tolerable of late. After all, the SPY only fell more than -2% once last week. Baby steps!

Sure, the SPX remains a hefty 14% below the all-time high set on February 19th. But that was a different time. That was before the tit-for-tat trade spat began. Before consumer sentiment went into the tank. Before bonds starting acting strange. Before hedge funds started blowing up. Before the line at the White House to negotiate trade deals wrapped around Pennsylvania Avenue. Before Wall Street analysts started hacking into their earnings and economic growth estimates. And before the President started openly talking about firing the Fed Chair.

Back in mid-February, the consensus earnings estimates for the S&P 500 companies was hovering around $270. This represented an increase of more than 14% over the final 2024 reading. It is worth noting that the $270 number would have been an all-time high. And as I've opined a time or two, if earnings are at all-time highs, it is logical to think that the major stock indices could certainly follow suit.

"Impossible To Predict"

But... With the administration looking to "move fast and break things" (as in, changing the way global trade with the U.S. functions) uncertainty has sky rocketed. Countries, companies, and consumers just don't know what the cost of stuff is going to be going forward. About the only thing that is certain is that costs are likely to be higher.

Perhaps the CEO of United Airlines said it best this week when he remarked it is "impossible to predict" what the future looks like - on many fronts. As such, neither the company nor the customer knows what to expect in terms of costs and, in turn, earnings.

So, Wall Street analysts have been busy trying to rework their estimates. And the bottom line is those estimates are all (well, almost all) heading one direction - lower.

What Are The Rules of the Game?

Even technology is caught up in the fray here. If you will recall, tech, especially megacap tech, held up nicely during the COVID panic. Why? Because companies like Microsoft (MSFT), Meta (META), Alphabet (GOOGL), Amazon (AMZN), etc. were "money printers." These companies had earnings you could depend on. It didn't matter if folks didn't go to the office, out to eat, or to the movies anymore because of COVID, they still needed all that tech stuff. Some even more than ever before.

While it sounded strange at the time, megacap tech became a safety trade due to the fact that investors could count on the earnings coming through.

However, this time around, tech is getting hit and hit hard. Why? Because no one is sure how tech will be impacted by the trade spat. Or which of their products will be banned next. As respected Wedbush tech analyst Dan Ives said this week, "nobody knows the rules of the game" here. Which, of course, creates uncertainty. A lot of uncertainty. And we all know how much markets hate uncertainty.

Sell First, Ask Questions Later

As a result, traders continue to dump their tech. Apparently it doesn't matter what the company's earnings prospects are because the bears simply say the estimates are wrong. Our furry friends argue that growth will simply come to a screeching halt. That the consumer will pull back. That the AI trend will fail. That new data centers won't be needed. That certain countries won't be allowed to buy cell phones, or chips, or...

Thus, any bounces in companies like Nvidia (NVDA) are "faded" (sold into) by traders in this market. Never mind that their products are sold out. Or that Taiwan Semi (TSM) told us this week that demand for AI remains very robust. Traders continue to see the glass as half empty right now.

How Do Things Change?

Don't look now fans but Nvidia (NVDA) currently has a forward P/E of about 23 (according to NDR), a PEG (PE divided by growth rate) of 0.25 (below 1 is considered good) and a sales growth rate of 115%. Yep, that's right, the company whose earnings grew 145% last year is starting to look downright cheap.

Especially when compared to the numbers at Wal-Mart (WMT) where the forward P/E is 34.8, the PEG is 1.51, sales growth is 5.6%, and EPS grew by 25.5% last year. Or Costco (COST) with a 50 forward P/E, a PEG of 4.65, sales growth of 6.1%, and EPS growth of 12.1%.

As such, anyone who missed the boat on the humongous gains that NVDA has enjoyed may want to start thinking about buying a couple shares - for the long-term, of course.

And this is how a negative environment can change. When companies that are strong growers become cheap from a valuation perspective, investors start to notice. And these investors aren't buying for the next 10 days or even months. Instead, they are looking several years ahead.

This may explain why history shows that stocks tend to be much higher after this type of waterfall decline. When things get cheap enough, people buy the dip.

Have Valuations Improved?

The natural question would then be, how much have valuations improved for the overall market during this correction? The answer is either not that much, or it is hard to tell.

While the P (Price) in the P/E ratio has gone down, uncertainty over the E (Earnings) has increased. Nobody really knows what the impact the trade war will have on Corporate America's bottom line. As such, it is difficult to determine what an accurate valuation is at this stage.

So, cue the guessing game. And while Wall Street analysts are always so sure of themselves on TV, nobody really knows what is going to happen here. And with valuations still high on the S&P, there is no clear call to buy (yet).

Time and Information is Needed

History teaches us that the stock market can handle just about anything, given enough information and time. At some point, corrections end. And bear markets (if that's what we're dealing with - it's hard to tell right now) end too as the reason for the decline becomes resolved.

Remember, good news CAN (and does) happen. It's just a question of when.

At some point, our take is the rules of the game will become clear. At some point, we will know the impact of the trade spat on earnings, the economy and inflation. And at some point, the outlook on earnings and valuations will also clear up. And at some point, buyers will return en masse to the stock market.

But until then, investors should exercise patience and selectivity. We also can be looking for the dust to settle a bit, for the volatility to fade, and for a basing pattern to become clear. From there, the breadth thrust indicators will likely provide an “all clear” signal. One can hope, right?

Thought for the Day:

The truth is that there is nothing noble in being superior to somebody else. The only real nobility is in being superior to your former self. - Whitney Young

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: MSFT, META, GOOGL, AMZN, NVDA, WMT, COST - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES