We won’t keep you in suspense: We think the bear market in the S&P 500 bottomed on June 16. If so, then we’re in a new bull market. Consider the following based on our Blue Angels framework (chart below):
(1) Corrections occur in bull markets when investors fear a recession that doesn’t happen. The forward P/E drops, while forward earnings continues to rise or flatten, along with the economy. When investors’ recession fears abate, the P/E rebounds, and the bull market resumes.
(2) Bear markets occur when a recession depresses the P/E and earnings get hit hard as both revenues and profit margins fall along with the economy, causing the P/E to move still lower.
(3) The latest bear market has been an odd one. Recession fears caused the S&P 500’s forward P/E to plunge from about 20 at the start of this year to about 15 at the June 16 bottom. Since then, recession fears have eased, so the P/E rebounded to 18 on Friday (chart below). The valuation multiple has rebounded just as the S&P 500’s forward earnings has started to dip. The dip should be short-lived as long as there’s no recession over the rest of this year and/or next year, as we are predicting.
(4) The S&P 500 price index needs to increase by just 0.8% to test its 200-day moving average (chart). Technicians would view a move above it as confirmation of a possible new bull market. If the index fails to move above its 200-day moving average, technicians would warn that the market’s strength since June 16 was likely no more than a rally within a bear market—and that it might be over.
