The market never cares about valuations until the market is destroyed and need a narrative to support price stability. The pricing mechanism of stocks has always been a game of confidence. At times this confidence is shattered to pieces, and when it is, the market panics lower. This process replays itself over and over. Back in the olden days they called these occurrences “squalls”. History is littered with such things and when you’re in them, you really do feel like it’s the end of the world. Alas, the world never ends and stocks, eventually, make higher highs.
In Stocklabs I planned for the fires and have historical valuation data at my finger tips. Here are some interesting facts for you.
I blacked out the avg PS column here because many of you are idiots. This is the technology sector. Look at it and tell me with a straight face it’s cheap, based on historical precedent.
Gross margins are DOWN year over year suggestive that companies are doing things to meet sales expectations. This is unsustainable and if the economy worsens, sales will fall off a cliff.
Earnings are down 12% YOY in tech.
Sales are up YOY, but look at the Q1 QOQ growth -29% v -24% the prior year.
YTD returns per sector with PE, PS.
During previous recessions earnings drop around 20-40%. Sadly, time is the most important antidote for a bad market. Prices stabilize after enough people had been wiped out and expectations are reduced to the point when earnings misses are met with high prices. Back in the 1973 oil embargo induced recession, big companies like MCD fell more than 70% from peak and market did in face SOAR in 1975 by more than 30%. Since we are merely 6 months into our squall, you should expect another year of agony before prices stabilize, if we are to follow the path of previous recessions.
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