Citigroup Inc (NYSE:C) analysts are at the forefront of attempts to boil market action down into a few easily read metrics. The company’s PULSE reports always provide interesting reading, particularly at a turning point like the one that has emerged in the past week. The S&P 500 has lost more than 1% of its value since 2014 began and much of the drop has come in the past five days.
According to Citigroup Inc (NYSE:C) analysts Tobias Levkovich, Christina Wood and Lorraine Schmitt, the market is generally undervalued, but a downward correction may still be on the way in the first half of 2014.
Citigroup forecasts uncertainty
The PULSE report is made up of five major sections, Price, Unanticipated, Liquidity, Sentiment and Earnings. In the most recent report, published Friday April 11, price and earnings looked Positive while liquidity and unanticipated events ended up tagged as Neutral. Sentiment, as anybody with an internet connection is aware, was negative.
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Despite the negative turn in sentiment, expectations remain in what Citigroup Inc (NYSE:C) calls the Euphoric arena. Their measure of sentiment, which they call Panic/Euphoria, sat at 0.53 this week, down from 0.59 in last week’s report. The number indicates an overheated market according to the analysts’ predictions based on historical data. the report suggests an 84% likelihood of a pullback based on the sentiment index.
Despite the negativity of sentiment, price ratios continue to be favorable according to the authors of the report. The analysts reckon that current P/E ratios are around 20% below historical averages. That signals that stocks still have some way to grow, but the mitigating factor that is sentiment may work against traders banking on that outcome.
The average P/E multiple of the S&P 500 lies at 16.45 percent. That’s well above the analysts’ designated sweet spot below 8x, but it’s also below the historical average of the market. According to the analysts, the equity market is undervalued by as much as a quarter. Negative headwinds are likely to have greater precedence in deciding direction for the time being, however.
Citigroup goes negative on 2014
The first half of 2014 may see a downward correction of between 5 and 10% according to the Citigroup Inc (NYSE:C) PULSE report. Weak EPS forward guidance may be the most important driver of such a correction. As earnings reports continue to pour in next week there will be a better picture of expectations in the year ahead. Right now the Citigroup analysts are expecting poor guidance despite decent upward revision in recent earnings.
According to the PULSE report earnings revisions have ticked up to 41.7% so far in April, up from 39.7% in March. Despite the positive revisions, and the attractive overall valuation the first half of 2014 looks like it will be a rocky one for equity markets.
PULSE reading warns investors off equities
Investors will be forced to decide whether or not to risk losses by investing in the equity markets in the first half of the year. Alongside the correction expected by the Citigroup Inc (NYSE:C) analysts, there is an optimist about the valuation of the market in the long term. Long term indexers will likely not be disrupted by the unpredictable nature of 2014, but those looking for value may be better off waiting to see what kind of correction the market brings before buying into equity markets.