Why 'buy the dip' is a fallacy: stocks are more expensive than they seem

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In 2000, the S&P 500 peaked in March but profit projections kept going up until September.

So, when stocks are falling but earnings-per-share estimates are yet to catch up, how do you evaluate the true worth of stocks?

Let's take the smaller of the two cuts and assume analysts will prune their projections by the same degree this time round, especially because expectations for a recession are building up just as they were in 2000. For the MSCI Emerging Markets Index, the valuation distortion is even deeper, given the higher volatility of EPS projections.

 

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