As Q1 2025 Draws to a Close, the Market Correction Has Made Valuations Fairer — And Given Investors An Opportunity to Accumulate
For a period of time after Trump’s November election victory, pundits on X were predicting a “golden bull rally” where “stocks never go down again.” At the time, the market might have indeed felt infallible as they notched numerous all-time highs, but that optimism around lower interest rates and a more lax business environment has come apart — replaced by recession fears, waning growth forecasts, and American tariffs disrupting global trade.
End of the status quo: Not even the Mag7 tech stocks, which had led the market higher throughout most of 2023 and 2024, have been immune. And not even Meta, which had stayed in the green despite uncertainty, could hold the line. Today, none of the Mag7 stocks are beating the S&P 500 over the past three months — but that could be welcome news for investors. In light of the recent correction in megacaps, the S&P 500 is fetching a much fairer valuation. And despite negative outlooks issued by companies, the pullback could be seen as an opportunity for more sectors to step up to the plate.
- Based on the most recent data from FactSet, the S&P 500’s forward 12-month price-to-earnings ratio is now 19.9x, just above the five-year average of 19.8x.
- To start the year, the health care, utilities, and consumer durable sectors have shown strength — limiting the index’s decline to just 3% on the year.
Delaying the Rise of the Rest
However, the rise of the rest might take more time in small and mid-cap names, which had flickered to life in the waning months of 2024 but have soured in sympathy with the wider market.
- Mid-caps in the S&P 400 Mid-Cap Index remained strong, with a forward P/E of 15.5x — making it a bargain deal in the current market.
- However, retail investors who helped repopularize the small-cap Russell 2000 after its first all-time high since 2021 aren’t getting a great deal — with its performance still excessively reliant on interest rates.
Comeback wen? The “rise of the rest” bet — both in large-caps and their smaller compatriots — has relied on lower rates and better macroeconomic conditions, both of which are in flux. The Federal Reserve said Wednesday that it still saw two interest rate cuts coming this year, boosting all stock indexes. But it’s hard not to feel like we’ve been living in a perpetual “higher for longer” state as a result of stubborn inflation — and there’s always the possibility that a re-emergence of inflation would prevent the expected cuts. Still, they say that money isn’t made in the up markets; it’s made in the down times — for many investors, now is the time to seek out opportunities.
