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Stock market is ‘massively’ overvalued, warns strategist

Stocks are in a risk-off mood six trading days into the New Year for a multitude of reasons, prompting one veteran strategist to issue a blunt warning to over-enthused investors. 

“We have never seen equities priced quite this high. The adjusted price to earnings ratio is pushing up against 40 times. The last time we saw that was in 1999. But if you look at price to sales ratios, that’s over three times — that’s higher than what we saw in the dot com bubble,” said Tematica Research chief strategist Lenore Hawkins on Yahoo Finance Live

Hawkins thinks stocks are “massively” overvalued, pointing to investors piling into momentum trades rather than doing their fundamental homework.

It’s hard to not be on the same page with Hawkins and others like her at this moment.

Stocks tanked on Monday, with the Dow Jones Industrial Average plunging more than 500 points. Selling in richly valued tech stocks such as Meta, Tesla, Block, PayPal and the Ark Innovation ETF persisted as 10-year yields continued their march higher.

Indeed, the market appears to be taking its lead from the bond market (as discussed further here by bond king Jeffrey Gundlach) and fears of quicker rate hikes from the Federal Reserve as it attempts to stomp out inflation.

The 10-year Treasury yield surged to 1.76% by the end of last week, up from 1.52% at the end 2021 (the largest five-day increase since September 2019, says Deutsche Bank). 

Said Goldman Sachs chief U.S. equity strategist David Kostin, “We have previously shown that the speed of rate moves matters for equity returns. Equities typically struggle when the 5-day or 1-month change in nominal or real rates is greater than 2 standard deviations. The magnitude of the recent yield backup qualifies as a 2+ standard deviation event in both cases.”

Kostin added Goldman is now looking for four rate increases in 2022, up from three previously. 

Meanwhile, companies are beginning to warn of a business impact in January from the fast-spreading Omicron variant. Today Lululemon said the variant is weighing on its business to cap off its fourth quarter, while FedEx acknowledges it’s seeing staffing shortages.

“We are closing out a strong 2021 in the coming weeks, and we’re pleased with how Lululemon has delivered over the course of the year. We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations,” Lululemon CEO Calvin McDonald said.

Per new data out of FactSet, 93 S&P 500 companies have issued earnings guidance for the fourth quarter. Of these companies, 56 have released negative earnings guidance and 37 have disclosed positive earnings guidance. More S&P 500 companies are issuing negative earnings guidance than positive earnings guidance for a quarter for the first time since the second quarter of 2020. 

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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