- US stocks are still pricey as the sizzling year-to-date rally falters, says Barclays.
- Equities valuations are still to high given the stubborn inflation environment.
- Barclays has an 2023 S&P 500 target of 3,724, more than 6% lower than current levels.
Investors have pushed stock prices from this year’s peak, but it looks like more downward pressure needs to be applied as high inflation is looking to be more stubborn than expected, Barclays says.
“[We] continue to believe that equity markets are trading too rich relative to most outcomes, particularly after accounting for stickier-than-expected inflation and more hawkish expectations for the Fed rate path, which should place both earnings and valuations squarely at risk,” Venu Krishna, head of US equities strategy at Barclays, wrote in a note to clients published Monday.
The base case at Barclays is for the S&P 500 to land at 3,724 in a shallow-recession scenario in 2023. That would represent a 6.6% decline from current levels.
Krishna said among his team’s findings, roughly 40% of stocks in the S&P 500 were still trading above their 10-year median despite higher rates and inflation.
The S&P 500 last week dropped by 2.6%, the worst weekly selloff of 2023 and the third consecutive weekly decline. It was around 3,985 on Monday. Stocks started 2023 with a rally after last year’s plunge but have recently suffered alongside a jump in bond yields. Surprisingly strong January inflation reports have spurred expectations the Fed will push up interest rates by more than expected and for longer than anticipated.
“[Yet] equities insist on looking through to a full reversion of price pressures to pre-COVID levels, a dynamic that we see as increasingly unlikely in the near term,” said Krishna. “Furthermore, the equity risk premium continues to diverge meaningfully from underlying economic growth, underscoring the outsized optimism baked into valuations as the Fed is forced to press the inflation battle amid a slowing macro backdrop.”
Sectorwise, the consumer discretionary and industrial groups were trading at highest premium relative to both pre-COVID levels and 10-year history. Meanwhile, the energy, communication services, and financial sectors traded at relative discounts to both pre-COVID levels and each sector’s long-term median.
PCE inflation data, the Fed’s preferred gauge released last week, “underscores how tall of a hill equities have yet to climb,” said Krishna.
The core PCE price index rose 4.7% from a earlier, higher than expectations of 4.4%.
The S&P 500 pushed higher during Monday’s session after stocks last week notched their worst weekly performance of the year.