At Limex we use Ai-powered models to analyze the markets, and identify which stocks are likeliest to outperform the benchmark on a weekly basis. Our tools are open to users of the platform at Limex Ai.
American equities are selling off fast.
Over the past month and year-to-date (at the time of writing), the S&P500 is down 6.4% and 3.6% and the Nasdaq 100 10.3% and 8.6%, respectively. By contrast, the main European indices (Dax, CAC40, FTSE100) are up, in average, 1.5% and 9.7% over the same periods (in local currencies, which means the gap is wider considering the 3% to 5% devaluation of the US$).
The triggers are fundamental, not technical - treat with care.
The sell-off of American equities has been mostly triggered by the market's increased wariness about an economic slowdown and inflationary pressures from new import tariffs. In all, as we've noted before, these negative catalysts could prove to be temporary if the administration soon provides clarity about its policy plans, allowing economic agents to re-organize and adjust. But if the uncertainty remains, it will likely drag forward-looking variables like investment and employment (i.e., these anticipate future production and consumption) which creates a negative feedback-loop of poor growth/high inflation/low investment and job creation/poor growth/etc. It is likely that American investors are including the rising probability of this scenario into their portfolio construction decisions.
Our Ai-models agrees that this is a fundamentals-driven market.
We reviewed Limex Ai's mega-cap stock rankings (i.e., stocks >$50b in market capital, ranked by chance of overperforming the market) and the main driver for stocks that had the largest rises and drops in score are analysts' earnings estimates and target price reviews, with some also including valuation multiples and capital efficiency metrics. By contrast, a few months ago - during the "good times" - the main drivers tended to be momentum, market capitalization, and growth expectations.
It pays to be patient and liquid - all pain eventually stops, but there are no near-term signs of an inflection point.
In times like this is easy - and to some extent, natural - to seek support levels at prior highs, over-weight RSI and MACD metrics, and even mis-identify any flicker as a double-bottom or inverted head-and-shoulders in search for a buy signal. Frankly, when fundamentals drive the market there are much bigger forces in play that outmuscle trading technical indicators - for example, a clear rotation from US to European markets as reflected by Euro/USD exchange rate and the strong outperformance of European equities. Without anticipating how long and how deep the sell-off will be, on a risk-adjusted basis it seems better to miss the initial rebound than being long the next leg down.
In the end, there's no better downside protection than buying cheap but stocks remain expensive.
The old guard in Wall Street remembers that there are fewer better entry points that when stocks are cheap. Using Goldman Sachs figures, at the end of 2022 the S&P500 traded at 17x earnings. However, and using the same house's estimates for 2025 - which include which could be proven to be an aggressive 13% EPS growth estimate - it currently trades at 21x.
If the policy front gains a firm-footing in the near term and the economy goes back to the 2.5% to 3.0% GDP expansion trend with sub-3% inflation and 4% to 5% unemployment, we could see a rapid recovery in earnings growth expectations and some multiple expansion. But otherwise, why not wait to buy cheaper - after all, every big loss started as a small loss, and every big gain started when buying cheap.
