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Economic outlook: The markets have adjusted, but where's the bottom?

July 15, 2022
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- Hi, I'm Heather Corkery, Managing Director of Client Portfolio Management at SEI. Today I'm here with Chief Market Strategist and Senior Portfolio Manager Jim Solloway to provide a preview of one of the timely topics he covers in our most recent economic outlook. Jim, the recent poor performance of financial markets suggests that investors have already priced in lots of bad news. How much more pressure do you think markets will encounter?

- Well, the future is difficult to predict. Stock valuations may provide some clues. The 20.6% price decline in the S&P 500 index during the first half of 2022 contrasts sharply with the ongoing increases in corporate earnings estimates. The forward price to earnings ratio for US large cap stocks has fallen back during the first half of the year to just above its average for the 2010 to 2019 period. The US technology sector has endured an even sharper valuation decline. Despite that steep drop, stocks remain expensive. Tech stocks in particular are trading at a 21% premium to their 2010 to 2019 average. The contraction has generally been far less steep outside the US but the PE for international developed market stocks is actually at a discount to its 2010 to 2019 average.

- Do you think stock prices reflect the possibility of a recession at this point?

- Perhaps not completely. PE ratios tend to contract as earnings estimates decline. Even if PEs remain at current levels, we should expect a decline in projected earnings and a comparable decline in stock prices as analysts incorporate a recession impact into their models. While nobody likes recessions, it's worth remembering that they are a normal part of the economic cycle.

- Thanks, Jim. Read our latest economic outlook and watch our longer conversation on risks, challenges, and uncertainty that investors are facing today. We're working to manage the client-specific impacts of this environment to determine the appropriate asset allocation strategy as part of our advisory process.


The forward price-to-earnings (P/E) ratio is the ratio for valuing a company that measures its current share price relative to its estimated earnings per-share (EPS) over the next 12 months.

Index definitions

The S&P 500 Index is a market-capitalization-weighted index that consists of 500 publicly-traded large U.S. companies that are considered representative of the broad U.S. stock market.

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