In the last two trading sessions, the S&P 500 (SPY) and Nasdaq (QQQ) showed meaningful weakness. They closed lower in each case. Valuation concerns are starting to shift positive sentiment toward negative worries.
Earlier this week, Fed Chair Jerome Powell characterized stocks as potentially trading at stretched stock prices. Had Nvidia (NVDA) not staged a multi-year rally and Tesla (TSLA) stock not snapped back, the markets would not look too attractive. The economy continues to face rising, persistent inflation. The job market is no longer as strong. Furthermore, the annual job revision cut 911,000 jobs from the total.
The S&P 500 (IVV) trades at a forward price-to-earnings ratio of nearly 25 times. In comparison, annualized earnings are only around 15% over the next five years. Stock markets are pricing no growth slowdown ahead. Yet signs of a weakening economy are starting to show up.
Tariffs caused a one-time spike in costs that U.S. suppliers absorbed. However, after cutting costs, those buyers do not have the capacity to keep absorbing tariffs. They will start raising the price of goods. This might cause a demand recession, especially for price-sensitive goods.
Watch out for the consumer discretionary market. Kenvue (KVUE), P&G (PG), Lululemon (LULU), and Nike (NKE) are some of the firms to be wary of. By comparison, Walmart (WMT) and Costco (COST) have a more loyal customer base. They should perform well in this new economic reality.
Related Stories
