When your neighbor asks: 'Has the stock market bottomed yet?'

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Today's newsletter is by Brian Sozzi, an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

So I am carrying my inflationary bag of groceries up the stairs on Sunday, trying to decompress for at least seven minutes, when I suddenly hear a neighbor call out: “Hey Sozzi, saw you on TV again. Has the stock market bottomed yet?”

My first thought: “I just can’t escape this sh*t, even for seven minutes."

I'm used to getting questions like this from a core group of neighbors (and others). This is partially because this particular person noticed, while flipping through Verizon FIOS (where Yahoo Finance lives 24/7 on channel 604), that I was doing live TV out of my kitchen (which happens to be above his kitchen) during the COVID-19 pandemic.

I concocted a quick reply in my head, then shouted back: “No idea bro, but I do know the stock market will open for business on Monday morning. Let me know when the co-op BBQ is happening.”

After the exchange, I walked into my place, unpacked those inflationary groceries (you see the prices for deli meat, insane!) and began writing this lovely newsletter for the investing masses.

My response to my neighbor was smart in that hucksters on the Street will be out in force trying to call a bottom for the bruised and battered stock market, even though folks have no clue either since they are the looking at the same market trends and data that you generally have access to.

All this is to say that you want to be very, very careful with bottom calls, given that market conditions will remain treacherous likely until the Federal Reserve signals a pause in rate hikes.

In any case, there are two opposing themes in the current market — and it’s up to you to figure out what fits with the analysis you are doing at this moment.

Theme one: Valuations are beginning to look attractive

The forward price-to-earnings multiple for the S&P 500 stands at 16.6 times. This is below the five-year average of 18.6 times and 10-year average of 16.9 times. At first blush, this would mark a good time to begin kicking the tires of stocks of well-run companies that are growing.

But keep this in mind — those five and ten-year averages don’t incorporate a major rate-hiking cycle from the Federal Reserve as we are about to witness. Therefore, I would argue valuations are not yet at super attractive levels (hence we may not be at a market bottom) — but it’s moving in that direction.

Although I do find it interesting that one-time growth juggernaut Netflix shares are trading at 15.2 times forward earnings, per Yahoo Finance Plus data. That is a below market multiple for a FAANG (Facebook, Apple, Amazon, Netflix, Google) stock, which is a rarity.

Curious on what to do if you own a bag of battered tech stocks? Give this a watch.

Theme two: Capitulation hasn’t happened yet

As I like to think of it, capitulation in the markets is when a large down move in a market occurs — one that wipes out all speculators. It’s at that point where a bullish base could start to be rebuilt in a stock or market. While we have seen a few large down days in the markets (and individual stocks, notably in tech such as Rivian, Netflix, and Upstart), the pros I chat with still aren’t seeing capitulation.

“Right now, I think investors are struggling with the bond market as much as the stock market. I think a balanced portfolio is becoming frustrating this year," John Hancock Investment Management co-chief investment strategist Matt Miskin said on Yahoo Finance Live. "Really what we are not hearing is that much capitalization on the volatility side. We had an 18-year run in the stock market."

In addition, Miskin mentioned investors are actually selling their defensive stocks.

"We are trying to say no, that’s not the answer," he added. "You want to look to add defense to the portfolio as we get to a later cycle. We are not seeing that capitulation yet.”

All in all, my advice to you today is this: Consider a second job to pay for your inflationary groceries, be nice to your neighbors, hit the gym, and beware of stock market bottom calls.

Happy Trading!

Odds & Ends

At least Goldman isn’t looking for another growth decline: Goldman Sachs chief economist Jan Hatzius slashed his second quarter GDP forecast to 2.5% growth from 2.9% (first quarter GDP fell 1.4%). Hatzius warned that consumer spending is starting to buckle under the weight of inflation and rising interest rates. Look for more investment banks to follow Hatzius this week after we get a key read on retail sales and earnings out of Walmart and Target.

The Twitter saga: Nothing too eventful from Tesla CEO Elon Musk on the Twitter deal over the weekend, just a few shots at Musk's actual plan here. A good note out from Jefferies analyst Brent Thill argued that Musk’s lofty growth goals for the platform are unlikely to be hit. Separately, yours truly and Julie Hyman got into a heated discussion (watch here) on Yahoo Finance Live on whether Musk should have put out a filing Friday on the Twitter deal being put on hold rather than saying it via tweet. Julie says yes on the filing, I say no. We're curious what you think: Drop us a tweet @juleshyman and @BrianSozzi.

Keep an eye on Walmart and Target: If we are speeding toward a recession later this year, small signs of concern will appear in the first quarter earnings out this week from Walmart and Target. One’s first instinct is to think that in a growth slowdown consumers trade down to discount stores to save money. That isn’t entirely off the mark. But this go around given extreme inflation in food, apparel, and other households items may be opting to go without.

In turn, that would mean sales slowdowns at discounters like Walmart and Target even dollar stores Dollar General and Dollar Tree. When Target and Walmart report this week, the most important analysis you can do is this: Look at first quarter “comparable sales” growth and compare it to the trends from the past five quarters. It will give you a good sense on how the consumer is handling high levels of inflation and how they may handle it differently in the months ahead.

What to watch today

Economy

• 8:30 a.m. ET: Empire Manufacturing, May (15.0 expected, 24.6 during prior month)

• 4:00 p.m. ET: Net Long-Term TIC Outflows, March ($141.7 billion during prior month)

• 4:00 p.m. ET: Total Net TIC Outflows, March (162.6 billion during prior month)

Earnings

Before market open:

• Warby Parker (WRBY) is expected to report adjusted earnings of $0.00 per share on revenue of $154.5 million

• Weber (WEBR) is expected to report adjusted earnings of $0.19 per share on revenue of $660.25 million

After market close:

• Take-Two Interactive (TTWO) is expected to report adjusted earnings of $1.04 per share on revenue of $870.05 million

Yahoo Finance Highlights

• Peloton's problem goes 'back to the hardware,' analyst explains

• Supply chains: Why we 'can't say the economy is super strong,' XPO Logistics CEO says

• Disney serves as a ‘consumer tracker’ amid recession watch, analyst explains

• What people consider 'wellness' is changing, MindBody CEO explains

• Goldman Sachs economist sees 'a slowdown in consumer spending'

• Elon Musk's Twitter goals have 'very low probability' of success, analyst says

• Retail sales, Walmart earnings, More Fedspeak: What to know this week

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