The markets are looking to open down again as the US administration offers no tariff concessions. We have espoused the markets were expensive for a while and earnings need to grow into the valuations. One of the main ingredients when looking to buy or sell stocks or an index is the price earnings ratio (PE). That is calculated by taking the stock or index price and dividing it by the earnings. As example. If the S&P 500 was trading at 10.00 and earned a 1.00 the price earnings ratio would be 10.
The dramatic fall in stock prices this past week have brought us down to about 16 x price earnings (P/E} ratio for 2026. The is well below the 10-year average of 18 and is about at the 20 year average. Today the markets will open at about 15 x 2026 earnings. This is a valuation that we have not traded on a fundamental basis in years. From a technical perspective, the markets are oversold on a short-term basis.
This is not an economic secular decline. While we understand the risks of a prolonged tariff war, we believe that this is a force majeure and the US, and the China tariff will eventually get resolved. The question is: When? According to reports, 50 countries have come forward to negotiate. We can’t imagine this lasting all year. If it does, this would put us in a recession. The price earnings multiple and the markets could go lower as it did in 1974 (8.5 x earnings), 2002(11x earnings), 2009 (8.5 x earnings), and 2020(11 x earnings). We are not suggesting that we go to those valuations, as those were anomalies. The markets are at their historical long-term average. If the economy weakens, we could see a further downside. Please understand that those who bought during those times did very well over the long run.
We are not calling a bottom as there is no clear winner in this game of chicken. It is very hard to catch a falling knife. What we are saying, because of current valuations, this is a much better time to start dipping the toe into the proverbial water at these valuation levels, than it was just two months ago. One way to do it, is if you have 100 dollars, invest a quarter now and invest a quarter if/ when there are further market dips.
Further downside would cause a more proactive buying approach.
Nathan Rothschild said: “The time to buy is when there’s blood in the streets, even if the blood is your own.”
Granite Group Advisors 