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Bank of America strategist Savita Subramanian has warned clients that stocks are still expensive despite the 10% move lower YTD in the S&P 500.
The U.S. benchmark index is up 17% from its June low, which makes the market multiple “excessively elevated.”
“Our analysis of the ERP indicates a 20% likelihood of a recession is now priced in vs. 36% in June. In March, stocks priced in a 75% probability of recession. Even on Enterprise Value to Sales, where sales should be elevated by the tailwind of 9% CPI, the market multiple is excessively elevated (+40%) relative to history – possibly because real sales growth ex-Energy is essentially flat,” Subramanian told clients in a note.
The strategist also urged clients to pay attention to the Rule of 20, which suggests that the stock market may be fairly valued when the sum of the P/E ratio and the inflation rate is at 20. Stocks are undervalued when the reading is below 20, and vice versa.
“Outside of inflation falling to 0%, or the S&P 500 falling to 2500, an earnings surprise of 50% would be required to satisfy the Rule of 20, while consensus is forecasting an aggressive and we think unachievable 8% growth rate in 2023 already,” Subramanian noted before adding that Rule 20 has a “perfect track record.”
Moreover, only 30% of the bank’s bull market signposts have been triggered so far. This compares to over 80% triggered signposts as far as prior market bottoms are concerned.
All in all, Bank of America once again reiterated its advice to clients to buy Energy and Industrials and sell Consumer stocks.
