April 7, 2025

QuickTakes

Looking For A Stock Market Bottom

In Fundamentals & Technicals

After the stock market crashed on Thursday and Friday of last week, we have to conclude that any day during which the Dow Jones Industrial Average isn't down more than 1000 points is a good day. Today was an okay day. The DJIA plunged 1652.81 through 9:42 a.m. It then soared 2518.86 by 10:16 a.m. on a bogus report that President Trump was willing to postpone tariffs by 90 days. By the end of the day, the DJIA was down 349.26. Is the market starting to bottom? It's literally debatable. Consider the following:

(1) Annual earnings estimates. Industry analysts have been lowering their S&P 500 earnings-per-share estimates, but they remain high at $268.85 and $307.03 for 2025 and 2026, up 9.2% and 14.2% y/y (chart). Those estimates are likely to fall over time, as estimates typically do since analysts tend to be too optimistic initially. They will fall a lot if Trump Tariff Turmoil causes a recession.

S&P 500 forward earnings per share has been flattening out at a current record high of $279.13. That puts the forward P/E at 18.1 based on today's close of 5062.25 on the S&P 500. That's relatively high given the downside risk to earnings.

(2) Earnings season. The analysts' consensus expected growth rate for Q1-2025 S&P 500 earnings per share has dropped sharply since the start of the year (chart). We reckon that the actual results will be better. However, the forward guidance that company managements give analysts is likely to weigh on estimates for the remaining three quarters of the year given the tariff situation.

(3) Technicals. The percent of S&P 500 companies with positive yearly price changes is down to 42.0%, which is consistent with past correction readings. It isn't likely to get much worse unless a recession occurs, which has become more likely but not inevitable.

The same story applies to the S&P 500 price index as a percent of its 200-day moving average.

Among the most oversold stocks are those in the Energy, Information Technology, and Materials sectors as well as the Magnificent-7 (chart).

(4) Sentiment. The latest reading of the AAII Bull/Bear Ratio, at 0.35, is as depressed as during previous bear markets. The same can be said about the Investors Intelligence Bull/Bear Ratio, which was 1.00 during the April 1 week. From a contrarian perspective, that's bullish.

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