BlackRock, the world’s largest asset manager, has been making a case that U.S. stocks look “cheap” heading into 2023, even if equities might still need to find a bottom and earnings remain a wild card. A chief reason? The S&P 500 index’s dramatic 20% decline on the year through Tuesday puts stocks on pace to post their worst year since the 38.5% plunge in 2008, according to Dow Jones Market Data.
“Bear market rallies can feel like cruel teasers of a turnaround,” BlackRock’s Tony DeSpirito, chief investment officer, U.S. Fundamental Equities, wrote in a first-quarter 2023 outlook on Tuesday. But with signs that inflation peaked and S&P 500
valuations reset lower, DeSpirito sees opportunities in equities, even if a mild recession hits and stocks fall further before finding a bottom. To help inform this view, DeSpirito’s team looked at how returns stacked up in the past 65 years based on the S&P 500’s trailing 12-month price-to-earnings ratio, a gauge of the value of a company’s shares based on earnings. The average one-year return was pegged at 11% (see chart) based on the S&P 500’s current 19.7x P/E range as of Nov. 30.
Stock market returns have been attractive at valuations in the current range