By Jacob Sonenshine

Long-term investors should start considering when to buy stocks again, even though calling the bottom of today's scary market would point to a lack of humility.

This isn't an ordinary selloff. All three major U.S. indexes were deeply in the red again on Monday. At its worst, the S&P 500 was at just under 5000, down 19% from the record high of 6144 it hit in late February.

The drop, which left the index just short of a 20% slide into so-called bear-market territory, dragged all sectors lower. Even those considered safe, such as healthcare and utilities, have tanked. According to SentimenTrader's Jason Goepfert, this rout has been one of the steepest in percentage terms among the 10 most highly correlated market declines: the drops where stocks have fallen all at once, by similar amounts.

Traders, investors, and analysts lack a historical reference point to use in envisioning where the bottom is.

"I feel scared," wrote Anatole Kaletsky, Gavekal Research's chief economist, on Monday. "I feel scared about last week's tariff driven plunge in global stock markets; about a U.S. recession."

The fact is that President Donald Trump's historically high tariffs on trillions of dollars worth of goods will significantly raise costs for consumers and businesses. Business and consumer confidence has fallen off a cliff, indicating that hiring, spending, and corporate profits may drop, too.

All that means the market may very well tumble a bit more. Even though stocks now appear cheaper, Wall Street doesn't trust the price/earnings ratios it is now seeing. Nobody knows how low companies' earnings will drop, especially because Trump has given little indication of relenting on the tariffs.

But the market's current fear is an emotional response, even if it is founded on a rational argument. While no one knows precisely, it is entirely possible that prices have tumbled more than earnings are likely to drop, making shares truly less expensive.

P/E multiples are the first reason for hope. Current estimates for aggregate S&P 500 earnings from analysts covering the index's companies are at $268, according to FactSet, unchanged from the end of February. But 22V Research's Dennis DeBusschere poses a scenario in which they might come in flat versus 2024, at $243. That would mean that at 5000, the S&P 500 would be trading at just over 20 times earnings, down from close to 23 times at the market's peak this year.

"Cheaper," but not "cheap," is the word for that. The multiple has gone into the teens in the past three years at times of high uncertainty.

The takeaway is that long-term investors, anyone can stomach the possibility of a little bit more downside from this point, might want to start putting a little bit of cash into the stock market. "We are not far from buying the market on valuation alone, even if the US economy enters a mild recession," DeBusschere wrote Monday.

His argument, summarized in a sentence, is that most of the recession and decline in earnings is already priced into stocks, so a rebound for the economy next year would enable the market to recover.

That requires a likely possibility, the Federal Reserve cutting interest rates, which is the second reason for hope. It would prefer to do so if inflation moves down toward its 2% target -- it was at 2.8% in March -- and the initial effect of tariffs could nudge inflation upward.

But if consumer and business demand weakens enough, inflation will ultimately come back down to earth. The Fed would cut, even if it doesn't do so until the second half of the year. Markets would anticipate a stabilizing economy and the start of an earnings recovery next year.

Interest-rate futures imply a 60% chance that the Fed will ease monetary policy at its June meeting, according to the CME FedWatch Tool. "The Fed could come to the market's rescue by cutting interest rates," Kaletsky wrote.

The third possibility is that Trump could ease fiscal policy. Trump's first commerce secretary, Wilbur Ross, told Barron's last week he believes the president would like to get the ball rolling on certain tax cuts for individuals and corporations by September, before Congress begins to focus on the midterm elections.

That would essentially inject cash into the economy, enabling consumers to spend more. If this happens, the Fed would be more cautious in cutting rates for fear of inflation, but fiscal policy would provide the stimulus.

It's time for folks to begin conversations about buying stocks, even if it means putting a little money to work while still holding some cash.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 07, 2025 13:50 ET (17:50 GMT)

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