Why Sam Stovall Thinks the Market Could Pull Back 5%–10%



Strategist Sam Stovall on the market’s pullback

On Wednesday, October 11, strategist Sam Stovall shared his views on tax reform in an interview with CNBC.

He believes earnings growth will play a major in market movements. However, in the present scenario, tax reform is playing an important role. According to Stovall, if we don’t get a tax reform, we might see 5%–10% pullback in market movements. However, spectacular earnings could help the S&P 500 index (SPY) recover.

In the previous part of this series, we discussed how businesses and the economy could benefit from tax reform. The S&P 500 index (IWM) is hitting new highs with strong hopes for a tax reform bill. Stovall thinks strong earnings growth could support the movement if the tax reform fails.

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Earnings and valuation

Both in 1Q17 and 2Q17, we saw that strong earnings growth drove market movement. Higher earnings growth also supported the higher valuation of the S&P 500 index. The S&P 500 index (VOO) is currently trading at trailing price-to-earnings multiples of 22.7x. The forward price-to-earnings multiple stands at 18.6x, which is much higher than the historical average of 15x, suggesting that strong earnings growth is supporting higher valuations.

For more analysis, see Delivering Alpha: Where Fund Managers Are Placing Their Bets.


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