Stock slump was deeper than it looked. That bodes well for a future rally
There’s reason to believe Monday’s market rally could be part of a bigger rebound for the S & P 500 , according to Morgan Stanley. With its 1.2% rally on Monday, the S & P 500 came roaring back from the brink of nearly entering a 10% correction. But measured by its price-to-earnings ratio, that drawdown was even more intense than it looked on paper — good news for investors hoping for a continued recovery, said Michael Wilson, an equity strategist at the investment bank. The S & P 500’s forward price-to-earnings multiple fell 15% from from its October high, Wilson said, evidence that the market has already been in a correction, and further proof that the pullback is already advanced “in both time and price,” the strategist said. “Those who claim the equity market is complacent are likely only considering price as opposed to looking at valuations,” Wilson said. .SPX 1D mountain S & P 500 on Monday Wilson said the valuation drawdown rivals what was seen during the manufacturing decline in 2015 and the recession scare of 2023. But this time is different, he said, because forward earnings growth has continued speeding up and is now nearing 20%. Given that, Wilson said it’s unlikely that the oil spike will cause the current business expansion to end. The stock market usually sees an above-average return when earnings are accelerating and the breadth of earnings per share revisions is positive, as is the case today, he said. On average, stocks gain 3% one month out and rise 9% over the next year in these situations, according to an analysis of data going back nearly three decades. “The deceleration that is now priced appears too severe to us,” Wilson said. “In other words, the market, via valuations, always gets in front of the change in growth.” The S & P 500 was on the verge of a 10% correction, defined as the size of the retreat from a recent high, after Friday’s 1.5% decline. But the broad index rebounded Monday after President Trump said the U.S. and Iran held “productive” talks and the U.S. would suspend attacks on energy infrastructure for five days. Still, even after Monday’s gain, the S & P 500 remains almost 2% lower than a week ago, and is down nearly 4% in 2026.
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