It might be tempting to buy the dip. After all, the S&P500 is down more than 15% from its August peak and is about 25% off its January high. However, one investor warns that now may not be the right time to do so. “After our modeling and valuation, it’s a bit early to get back into the market,” says John Ricciardi, head of asset allocation at Deuterium Capital. Ricciardi said he would like three metrics to trend positively to find “good returns on risky assets.” They are: earnings growth, falling borrowing costs and global liquidity – and he says all three are currently missing from stock markets. Excluding the energy sector, earnings estimates for the third quarter are already down 2.6% compared to the previous three months, according to Refinitiv. With high inflation and rising interest rates, Ricciardi says valuations in equity markets need to fall further before buyers return. “We’ve had about a 25% discount in global markets this year and this is the start of a bear market. But quite often we’ve seen more than that before you hit a bear market bottom.” Riccardi said investors should sell stocks in the technology, consumer discretionary and communications sectors because they all depend on rising consumer spending – which the Federal Reserve encourages by raising interest rates tried to lower. He also said industrial production is likely to see an “unexpected slowdown,” along with an 8% slump in retail sales over the next three months, either of which could drag stocks lower in the near term. What should investors buy? Ricciardi said investors should reposition into interest rate-sensitive stocks — the so-called defensive stocks — and identify companies in the consumer staples sector. Procter & Gamble, Coca Cola and Pepsi Co were among the stocks he thinks could do well as interest rates continue to rise. Procter & Gamble has an average buy rating from analysts, with a target price 24% above its current share price, according to FactSet estimates. However, Goldman Sachs analyst Jason English downgraded P&G to neutral on Monday over concerns about the company’s exposure to non-US dollar earnings during a period of dollar strength. Ricciardi, who is also a fund manager at Deuterium, suggested Dominion Energy, NextEra and Duke Energy in the utilities sector and Air Products and Sherwin-Williams in the “little corner” of the materials sector. FactSet data shows Dominion Energy and NextEra have average analyst ratings of “buy” with 37% and 29% upside, respectively, from current levels. Duke Energy averaged a hold rating. Andrew Bischof of Morningstar’s equity research team was the only analyst with a sell rating for both NextEra and Duke Energy.
