How low can stocks go? Updated risks and values – May 3rd, 2021

How low can stocks go? Updated risks and values – May 3rd, 2021

Bottom Line: The purpose of this story is to inform you as to what's possible in a near worst-case outcome for the financial markets. The reason is to understand what's possible, though unlikely, so you can plan soundly for your financial future unemotionally. The US stock market is the greatest wealth creation machine in the history of the world. I want you to benefit from it without making emotional mistakes with money. 

Too often when we have a rare short-term downturn in the markets - it's too late to offer up information that might have been helpful ahead of time. This week's edition of "how low can stocks go", goes as follows...re the Dow, S&P 500 & Nasdaq stand against their all-time high levels:

  • DOW: within 1%
  • S&P 500: Record high
  • Nasdaq: within 1%

Stocks treaded water over the past week as the threat of significant tax increases proposed by President Biden continued to be balanced by incredible earnings. Speaking of which... Through Friday, 60% of companies had reported earnings with a remarkable 86% that have exceeded expectations and the average beat is by greater than 23%. If this holds, we’ll have the most impressive earnings season reported in modern stock market history. We're currently pacing the 2nd best earnings reporting season relative to expectations in recorded history. 

As we enter this week here’s where the market stands based on fundamentals using the S&P 500 as the example.

  • S&P 500 P\E: 42.57
  • S&P 500 avg. P\E: 15.92

The downside risk is 63% based on earnings multiples right now from current levels. That's 36% more risk compared with this time last year. The market remains historically expensive right now. Stocks are clearly priced for earnings to continue to rebound. If the economy does continue to recover as expected, stock prices can be justified. If something were to come out of left field – there’s clearly a lot of room for downside. That’s basically where we are right now.

It's always important to ensure that you're positioned for negative adversity. If a 63% decline wouldn't affect your day-to-day life, you're likely well positioned. If not, you should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.

Photo Credit: Getty Images


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