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There are some very significant headwinds:
-Inflation is almost out of control. The one thing we have not seen yet is significant wage pressure. That is what creates an inflationary spiral. I don't think it is a good bet that it won't happen. Train workers in the UK are on strike right now demanding an 11% raise. The same thing likely to happen here.
-The Fed is hiking rates from extremely accommodative levels. More importantly, it is shrinking its balance sheet. The spreads on mortgage securities have blown out as a result. The Fed has been the biggest buyer of that stuff for over a decade.
-Powell basically told us yesterday that nothing that has happened yet is particularly worrisome to him. 20%+ down in the S&P, mortgage rates exploding, etc are not even on his radar. The Fed is going to continue to hike rates aggressively to try to get this situation under control. In the past, the Fed could be counted upon to bail out the stock market. This will not happen with inflation at these levels.
-So far, the decrease in stock prices has made forward P/E ratios look less insane than they did before. This is an illusion. Given the backdrop discussed before, it is only a matter of time before the estimates of future earnings get slashed by Wall Street. When you lower the denominator, it has a huge effect on the ratio.
- Russia and Ukraine are at war, impacting energy and food production.
- China's zero covid policy means that there is always a risk that significant parts pf that country will shut down randomly and inconveniently.