Over the past year, inflation has been having a positive impact on analysts’ consensus forecasts for earnings in 2022 and 2023 but a negative impact on the valuation multiple that investors are willing to pay for those earnings estimates. Needless to say, the former positive effect has been trumped by the latter negative effect. The negative impact reflects the jump in bond yields so far, concerns that bond yields will continue to move higher, and fears that this will all end with a recession.
This clearly hasn’t been another one of the garden-variety panic attacks that we have been chronicling in the stock market since 2009. Most of them turned out to be minor, short-lived selloffs. A few were full-fledged corrections. The selloff in 2020 technically was a bear market, but it didn’t last very long, and we included it in our list of panic attacks. The S&P 500’s selloff to date leaves it still in correction territory, but the Nasdaq is in a bear market. That’s because the latter is dominated by Growth stocks that are more adversely affected by rising bond yields than are Value stocks.
