When Will the Stock Market (S&P500) Bottom?

The US stock market has dropped sharply in the first half of the year. According to CNBC "The S&P 500 posted its worst first half of the year since 1970, hurt by worries about surging inflation and Federal Reserve rate hikes" (Macheel and Stevens, Jun 29 2022)

Well, it does not feel the stock has done so badly, maybe because I always set my mind on the long run.

How bad has the S&P 500 been hurt?

• The index closed at 3825.33 which was at the level close to what it was in Jan 22, 2021, which is one and half year ago. Dropping 971.23 points, 20.25% , from the current high of 4,796.56 on Jan 03, 2022.
• The bottom point was 2304.92 om March 20, 2020 during the Covid crisis, which is another year back. This means the index has been dropping more longer than rising since it bottomed for the Covid crisis.
• Also, the index has risen 2491.64 points since the recent bottom of 2304.92 points which is a 108.1% rise. The half point is 3644.1 points.
• In conclusion, the S&P 500 index has dropped half of the time span and almost half of the earing since the Covid bottom.

What about PE ratio?

On July 21, 2021, I wrote an article about whether the S&P 500 index was too high and found that the its PE ratio was 46.31% which was very high comparing to the average of 15.95%.

Now the PE ratio is 19.33. 3825.33/19.33= 197.896. If the index is to get to the average point, it has to be 197.896x15.96=3158.42.

https://www.multpl.com/s-p-500-pe-ratio

What about the effects of Interest Rates?

The higher the interest rates the lower almost all other financial assets, because of pretty much all valuation depends highly on them. So if inflation stays high, US empployment data stay strong, the Fed is almost going to raise rates. 

Then, the target PE ratio of historical average may be too optimistic.

Conclusion

• Time-wise. the S&P 500 index has dropped to the previous half point during its climb and the index values almost dropped to the half point, too.
• PE ratio almost reaches the historiacal mean.
• Next immediate thing to watch is companies' earnings. If they are not too bad, I think now is the bottom, given signs of contained inflation.

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Sources: 

S&P 500 posts worst first half since 1970, Nasdaq falls more than 1% to end the quarter. CNBC.https://www.cnbc.com/2022/06/29/stock-market-futures-open-to-close-news.html.2022/6/29.

S&P 500 PE ratio. https://www.multpl.com/s-p-500-pe-ratio. 2022/7/3.