The S&P 500 has only just started to correct for higher-for-longer interest rates. We use the U.S. 30-year bond (TLT ETF at 20+ years is a good proxy) as the risk (or, volatility) is similar to that of the S&P 500. Since the U.S. Treasury has started to issue more coupon debt, the equity market has started to correct. But it’s nowhere close to where it was in the third quarter of 2022 when peak yields were lower than where they are today. History suggests the multiple for the market should be closer to 16 to 17 times if rates are likely to be closer to current levels over the next year.

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Forecasts for 12-month forward earnings per share is about 219. On a bottom-up weighted index basis (if all stocks hit their price target at the same time), this projects a 5,130 price target for the S&P 500, and at 17 times, 3,723 from a top-down basis. So, are the optimistic analysts correct, or will the market multiple move back to more rational longer-term valuations? None of this really contemplates a hard landing environment where earnings would fall.

While the market is oversold after a tough September, and earnings season is not likely to be too bad (no real job losses yet), the important support around 4,200 can hold. But if we start to see it give way, do not be surprised if we give up all the gains for the year as the market returns to more rational valuation. And do not look for bonds to protect your portfolio until the market starts to price in a hard landing and the U.S. Federal Reserve signals they are vacating the higher-for-longer narrative.

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