The Dow is down -3.8% since it hit its all-time high on September 18.
The sell-off was exacerbated by the ongoing budget fiasco in Washington, which has forced the government to shutdown and the debt ceiling to inch closer.
Policy analyst Greg Valliere says stocks will need to fall more to get Washington’s attention.
But ConvergEx chief market strategist Nicholas Colas thinks U.S. equities are still “beautiful.”
“‘Beauty’ in this case comes down to valuation,” he wrote this morning. “Are U.S. stocks cheap enough to elicit incremental interest? Recall Keynes’ observation: they don’t have to be attractive to just you. Others must also think they merit their attention as well.”
Colas cites the three reasons why he thinks stocks are beautiful:
- Corporate earnings of $US26 per S&P500 share are at all-time highs. In 2007 they were at $US24. “U.S. companies have done a good job squeezing profits out of a lackluster U.S. and global economy,” Colas writes. “If the U.S. economy were as strong as these companies, we’d have 4% unemployment and 4-5% GDP growth rather than +7% joblessness and 2% macro growth. The stock market is not the economy, and shareholders in U.S. companies can thank their lucky stars for that fact.”
- And corporate earnings growth will continue, possibly reaching up to $US29/quarter in 2014.
- Price to earnings ratios may actually be cheap. “Assuming that $US115 is an achievable earnings number for the S&P 500 next year, the market currently trades for 15 earnings,” said Colas. “Against historical norms for periods with low interest rates, that’s cheap enough to keep money plowing into stocks.”
Stocks are currently in the red again. Perhaps this is the buying opportunity.
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