Why the recent sell-off of US share markets could be over
The recent sell-off of US share markets could be over and is far more modest than market corrections in recent years, with buyers having already entered the market after Monday's drop, and the outlook is still positive, with expected gains for Australian and US markets by the year's end.
The current drawdown is much smaller than the market drop in COVID (-34%), the GFC (-16%), or even the 2022 Fed tightening cycle (-24%), compared to -10% for the current drop, as the table below shows.
Furthermore, we think US stock prices could be bottoming. Systematic or computerised selling, which had been a key factor behind the price falls earlier this week, could be close to exhaustion, and this could help stabilise global share markets.
We could even see computerised traders flip into net buyers if stock prices stabilise further, which we have already seen in the last two US trading sessions.
While the sell-off in US stocks has been broad-based, defensive sectors such as consumer staples, utilities, and healthcare stocks have largely held up, while technology companies and small caps initially led declines.
However, since Monday, investors have been back to buying technology leaders like Nvidia and Intel. While down around 15% over the past month to March 13, that's less than 20% at the start of this week.
The Nvidia GTC AI conference on March 17-21 could be an important sentiment test, with any comments from CEO Jensen Huang likely to be very closely watched by global investors. Trump's America First Speech in April will also be a key event for clarity on tariffs, trade policy and likely economic direction.
Following Monday's sell-off, US equities are now attractively priced and that is likely to bring in more buyers, which will support stock prices.
On a forward basis, the S&P 500 trades at a 2026 price-earnings (P/E) multiple of 18.6 times and a 2027 P/E ratio of 17.0 times, only slightly richer than MSCI World. That is supported by higher earnings growth expectations for US companies.
By the year's end, the S&P 500 is expected to hit 6174, rising 11% from now and up 5% from the end of 2024. That forecast is based on 10% EPS growth and 6% annual dividend expansion. In Australia, the SP/ASX 200 could reach 8128 by the year's end, up 5% from current levels and 2% lower from end of 2024.
That is likely to be supported by earnings per share (EPS) growth of 7% from a year earlier and dividend growth of 7%, though stock market volatility is likely to remain a feature of markets this year.
Gold prices too are likely to remain high.
Gold flirted with a fresh record high this this week and has done its job very well by being much more resilient than equity markets.
We expect gold will appreciate in the short-term and could finally break through US$3000/ounce to potentially reach US$3200, as the macroeconomic and geopolitical environments are very positive for gold.
Volatility in share markets too push more safe haven buying of gold, while geopolitical challenges and central bank buying are also key factors behind the precious metal's rise.
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