S&P 500 nears ‘fair value’, says analyst who called stock-market selloff, but beware of ‘overshoots’

The stock market probably hasn’t hit bottom, but it’s getting near fair value, says a prominent Wall Street analyst who was among the first to call last year’s fourth-quarter selloff. But beware the market’s tendency to overshoot, which could leave scope for further downside.

“The S&P 500 is now close to our view of 2,750 ‘fair value’ in 2019, but we are aware that overshoots are the norm in this market,” said Barry Bannister, head of institutional equity strategy at Stifel Nicolaus, in a note.

The call is unlikely to be much comfort to stock market bulls, with Bannister arguing that the market will continue to struggle over the longer term in light of what he views as overly tight monetary policy by the Federal Reserve. Indeed, this month’s market action indicated that the “sell in May and go away” rule returned in 2019 after a five-year absence, he said.

The 2,750 fair value call assumes a price-to-earnings ratio of 17.5 and reflects expectations Wall Street analysts will cut 2019 S&P 500 earnings per share forecast to $156 from its current $166. That’s likely to come before a Fed rate that’s likely in the second half of 2019, Bannister said.

Bannister, citing concerns over the Fed’s steady stream of rate rises, warned last September that stocks were entering the “danger zone” and that a bear market — typically defined as a 20% fall from a peak — was likely within a year. Stocks sold off sharply in the fourth quarter as Fed-inspired fears of an economic slowdown took hold, with the S&P 500 SPX, +0.21%  ending just shy of 20% below its all-time high on Christmas Eve before mounting a bounceback that took the large-cap index to a new all-time closing high in April.

Stocks have retreated substantially in May,

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