Key Points
- The S&P 500 and Nasdaq are down 16.6% and 20.2%, respectively, from February highs.
- We believe fair value starts around 4,500 on the S&P 500, ~11% below current levels.
- The crash may not be over — technical and fundamental factors suggest further downside.
- Despite the market-wide gloom, some names like GOOGL are starting to screen attractive on a GARP basis.
- We recommend holding elevated cash allocations and rotating into high-dividend, defensive equities.
What’s Going On?
Markets are in full retreat. Triggered by a sweeping U.S. trade policy shift, the S&P 500 and Nasdaq 100 have fallen 16.7% and 20.2%, respectively, from their February peaks — including a 10% drop in just three sessions. This puts the current drawdown in the company of:
- 1987 Black Monday (DJIA -23% in one day)
- Dot-com crash (Nasdaq -78% over 18 months)
- 2008–09 financial crisis (S&P 500 -57%)
- March 2020 COVID selloff (S&P 500 -34% in 1 month)
- 2022 post-COVID inflation-driven decline (-25% over 10 months)
The pace of this drop resembles only Black Monday (1987) and March 2020—both short, sharp, and systemically unsettling.
The current S&P 500 FY2025 EPS estimate stands at $268, down slightly from $274 in December. At today’s index level, that implies a 19.0x forward P/E—still expensive, in our view.
We expect Street estimates to fall another 5–15%, which would raise the implied multiple to 20–22x—well above our fair-value benchmark of 18x.
Our preferred entry point: S&P 500 at or below 4,500, depending on how far earnings forecasts fall.
Patience Pays
In 2008, the market experienced multiple false rebounds before its ultimate bottom. We believe this current selloff could follow a similar pattern, and we recommend waiting for two signals before repositioning:
- Attractive valuations (P/E < 18x)
- Stabilized policy outlook
What Worries Us Most
Margin leverage ballooned to $930 billion by February 2025, up from $600 billion in early 2023. Over the weekend, Financial Times reported hedge funds are facing margin calls comparable to March 2020. If forced sales continue, we risk a snowball effect—a gamma squeeze in reverse.
- Stagflation Meets Policy Gridlock
The market is split between contradictory expectations:
- Treasury market: 5 rate cuts by YE2025
- Inflation swaps: CPI rising to 3.5% in 2025
Both can't be true. If inflation stays significatly above the Fed’s 2% target and climbing, rate cuts are unlikely. Core PCE was 2.8% in February, up from 2.7% in January—and likely to spike again as tariffs hit consumer prices.
The Fed, in a stagflation scenario, would likely be forced to tighten policy even into a slowdown, just as it did under Volcker from 1979–83.
Despite the Gloom: Some Value Is Emerging
We monitor the Mag 7 closely, given their collective ~30% weight in the S&P 500 and ~40% in the Nasdaq 100. One name stands out:
GOOGL / GOOG
- Down ~9% YTD, underperforming S&P and Nasdaq
- Minimal trade policy exposure
- Net cash balance sheet
- ROE of 25%+ and ~15% EPS growth
- 2025–2027 EPS: $9.0 / $10.2 / $11.7 → P/E: 16.3x / 14.3x / 12.4x
The stock’s fundamentals and strategic positioning in AI, Android, and autonomous vehicles make it a compelling GARP candidate.
Final Take
We remain skeptical short-term and recommend:
- Holding elevated cash allocations
- Avoiding attempts to time rebounds
- Rotating selectively into GARP and high-dividend defensives
If you're tempted to buy this dip—wait a little longer.
