It can be tempting to buy a dip. After all, the S&P500 is down more than 15% since its August peak and about 25% from its January high. But one investor warns that the time may not be right now. “It’s too early to get back into the market, according to our modeling and valuation,” says John Ricciardi, head of asset allocation at Deuterium Capital. Ricciardi said he would like to see three metrics become favorable for finding “good returns for assets and risk”. These are: earnings growth, lower borrowing costs, global liquidity – and he says all three are currently missing in the stock markets. Excluding the energy sector, earnings estimates for the third quarter are already down 2.6% compared to the previous three months, according to Refinitiv. With inflation soaring and interest rates rising, Ricciardi says stock market valuations will need to drop further before buyers return. “We’ve had about 25% off this year in global markets, and that’s the start of a bear market. But often, we’ve seen more than that before you hit the bottom of a bear market.” Ricciardi said investors should sell stocks in the technology, discretionary, and telecoms sectors because they all depend on increased consumer spending — which the Fed is trying to reduce by raising interest rates. He also said industrial production will likely see an “unexpected drop” along with a 8% collapse in retail sales over the next three months, both of which could drag stocks lower in the near term. What should investors buy? Ricciardi said investors should change their attitude toward interest rate-sensitive stocks — so-called defensive stocks — and specific companies in the consumer goods sector. Procter & Gamble, Coca Cola and Pepsi Co were among the stocks he thought might be fair while interest rates continue to rise. Procter & Gamble has, on average, a buy rating from analysts with a price target 24% higher than the current stock price, according to FactSet estimates. However, Goldman Sachs analyst Jason English lowered the P&G rating to neutral on Monday due to concerns about the company’s exposure to earnings in currencies other than the US dollar at a time of dollar strength. Ricciardi, who is also a fund manager at Deuterium, has proposed Dominion Energy, NextEra and Duke Energy in the utilities sector and Air Products and Sherwin-Williams in the “little corner” of the materials sector. FactSet data shows that Dominion Energy and NextEra are long-rated by analysts, on average, with 37% and 29% up, respectively, for their share price from current levels. Duke Energy had a suspension rating, average. Andrew Bischoff of Morningstar’s equity research team was the only analyst with a sell rating on both NextEra and Duke Energy.
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