. The only real debate over the coming correction is its timing and scale, even if U.S. stocks still end the year higher.
Benson Durham, head of global asset allocation at Piper Sandler, runs about 10 million models to garner fair-value equity estimates for 11 developed economies. Around 9.4 million imply U.S. over-valuation, around 700,000 imply under-valuation. The S&P 500 is still up 3.5% this year, the Nasdaq up 10%, and the S&P 500 price-to-earnings ratio comfortably above historical averages and current international comparisons.
Keith Lerner, co-chief investment officer at Truist, points out that stocks have only sustained higher valuations twice in the past 30 years – during the tech bubble and more recently during the pandemic overshoot. The jaw-dropping change in the U.S. interest rate landscape bears repeating. On Dec. 31 last year the implied peak Fed rate in mid-2023 was 5.0% and the end-2023 implied rate was 4.50% - they are now almost 50 and 80 basis points higher, respectively.
In their bear case scenario - a “normal” recession - EPS falls 14% to $190, and the index slumps more than 18% to 3230 by the end of the year.