The recent sell-off in the S&P 500 has pushed the index’s valuation to its lowest level since March 2016, and if history is any indication this might be a buying signal.
The last time the S&P’s price/earnings ratio dropped below 17.35, the index rallied nearly 20 percent in the next year.
Looking at the P/E allows investors to compare companies of drastically different prices across all sectors. At the most basic level, it’s what the market is willing to pay for growth.
Given the S&P 500’s nearly 10 percent move off its recent high, and sharp decline in valuation, one market watcher says there are plenty of bargains to be found.
“As a long-term investor, I think this is definitely a buying opportunity,” said Mark Tepper, Strategic Wealth Partners president and CEO. On CNBC’s “Trading Nation,” Tepper said Thursday that stocks will move higher once there’s clarity on the Fed’s rate-hike path, and once trade tensions with China ease. He also pointed out that while earnings growth has been slowing, it’s not contracting, meaning there could still be upside ahead.
While Tepper is adding to his portfolio on the dip, he’s not buying the market generally. He believes this bull run is in its late stages, so he’s specifically looking for companies that outperform regardless of overall economic conditions.
“I think you should focus on companies with low debt levels. The companies that get hurt the most when the economy slows are high-debt companies,” he said. “This is now a stock picker’s market, so it’s time to ditch your index funds.”
While S&P companies broadly are experiencing earnings deceleration, Tepper also pointed out that software companies are bucking that trend and delivering growth. “They’re basically all subscription based, which is recurring revenue, which is the best kind of revenue. So there are great opportunities out there for stock pickers.”
The S&P’s valuation may be at its lowest level since March 2016, but TradingAnalysis.com founder and market technician Todd Gordon believes the pain isn’t over. By examining the charts he’s identified 2,350 as a key level to the downside for the S&P, meaning stocks could drop another 11 percent before this pullback reverses.
“I don’t think the buy point will be anywhere in the next 100 points,” he said. “I do think we have another push to go despite some strong points in the market. … I’m short, I think we go lower. If you’re an investor, raise some cash.”