Stocks have been a horror show. Here’s how to tell when the market is near capitulation

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Stocks have been a horror show. Here’s how to tell when the market is near capitulation

Traders work on the floor of the New York Stock Exchange (NYSE) in New York on April 6, 2022.

Brendan McDermid | Reuters

How do you spell “surrender”? FEAR.

That’s what this market produces and there was no escaping this wild bear for your lunch. The S&P 500 is down 14% from Jan. 3 to May 2, and the Nasdaq is down 23% since mid-November.

Take this in: For the S&P 500, that means a loss of $5 trillion. For the riskier Nasdaq, the drop sloughed off roughly $7 trillion in value, including many names that are also in the S&P 500. developed to save the country was about $2 trillion.

In comparison, the gross domestic product of the United States, the value of goods and services produced in this country, was $21 trillion in 2021, just triple the recent market implosion. It’s even more than Elon Musk’s net worth.

April was heartbreaking for investors

Six weeks ago, after the March lows, I wrote an article suggesting that the correction left investors with bargains to consider. Turns out I was early. Although the S&P 500 snapped back and is up 11% in about two weeks, it has failed to hold on to those gains and has given them all back and more.

The 8.8% drop in April was, quite simply put, a heartbreaking disaster for most investors who have been veterans like me enough to know that nausea is an occupational hazard. Still, we’re roughly where we were a year ago on the S&P 500 and comparable to December 2020 on the Nasdaq. I wish someone with an accurate crystal ball would have told me that a year and a half ago.

That never happens though, so let’s look at the cold hard stats of the market and analyze what we see. The S&P 500 is trading at 18.8 times this year’s estimated earnings and 17.2 times 2023 earnings. Those numbers had been falling since earlier this year, when the price-to-earnings ratio was 21.5 times 2022 and 19.6 times 2023 of estimated earnings, according to FactSet.

The market caps of the five largest index stocks: Apple, Microsoft, Amazon, Tesla, and Alphabet, which collectively trade at 29 times earnings, pull the S&P 500 up many times as a whole.

As the table below shows, excluding those five, the remaining 495 stocks are selling at price-to-earnings multiples of 16.7 times 2022 and 15.7 times 2023 — far from a sky-high price valuation. Data is current as of the close of trading on May 2nd.

(Note: The charts below show the top six companies to reflect Alphabet’s dual share class structure.)

Zoom In IconArrows pointing outwardZoom In IconArrows pointing outward

Search for bargains through the rubble

There are now 137 stocks with a market cap above $5 billion that are down 40% or more from their six-month highs, and 53 that are down at least 60%.

Patient investors should start sifting through the wreckage of these cohorts to find attractive stocks to nibble on. The most important (not easy) variable is whether these companies can meet their earnings-per-share estimates in a rapidly changing inflationary and higher-interest-rate environment.

Reading the charts will offer no consolation to potential buyers of these depressed stocks, all of whom are in technical purgatory and are being swamped by vast amounts of “resistance.” My definition of this term is when numerous owners of a stock have lost so much money that they are willing to sell after a move higher.

While that remains so, the techs can’t really page the bottom until it happens. It might be a smart move to use some sideline capital to invest in strong companies that you might have been following for years. Let’s keep an eye on the FEAR Index – we’ve been watching a horror movie for months and when everyone closes their eyes, they don’t see the bargains anymore.

Karen Firestone is Chair, CEO and Co-Founder of Aureus Asset Management, an investment firm dedicated to providing contemporary wealth management for families, individuals and institutions.