It is a question that invariably arises whenever indices go through turbulent phases. Is the current dip an entry point? With the Nasdaq entering correction territory (a 10% decline from its peak) and the S&P 500 posting five consecutive weeks of losses, the question is weighing heavily on investors' minds.
The war in Iran has triggered a surge in energy prices. Brent crude is expected to post its largest monthly increase on record for March. This shock is reviving inflationary fears and is also expected to weigh on economic growth.
However, while the macroeconomic outlook appears to have taken a serious hit, analysts have yet to reduce their earnings expectations. In fact, these estimates have slightly increased over the past month. Analysts forecast 13% EPS growth for Q1 and 17% over the full year for S&P 500 companies.
To put it simply, rising energy prices have boosted earnings estimates for the energy sector, while revisions for other sectors remain marginal. Consequently, target prices have been significantly raised for energy stocks.
Source: Factset
When you combine a decline in indices with a slight increase in earnings expectations, you get valuations that have cooled considerably. The S&P 500 is now trading at under 20x forward earnings. This marks the first time since the tariff crash last April that the S&P 500 has returned to its 5-year average valuation (19.9).
Source: Factset
