You have to admit: The Fed gets what it wants, if what it wants is lower stock and housing prices. FedEx’s somewhat dire suspension on everyone’s earnings prompted a reset of earnings forecasts for the rest of this year and into 2023, but how well does this one company represent anyone else? Here are two main points: FedEx specifically cited “macroeconomic weakness in Asia and service challenges in Europe” that affected Express revenue. The companies that have participated in many of the sell-side conferences in the past two weeks have not painted anything close to the dire picture painted by FedEx. However, the talk over the weekend was once again about resetting earnings expectations. What is the right price for the S&P 500 index? For the S&P 500, Michael Hartnett of Bank of America said, “We say nibble at the SPX 3600, bite at 3300, strait at 3000.” Fabulous. Friday’s S&P 500 closed at 3,873, the June 16 low was 3,666, so 3300 and 3000 are far away. How do you get these kinds of numbers? The game goes like this. There are two variables in these estimates: What is the correct level of forward earnings? What is the correct market multiplier (price-to-earnings ratio)? Current forward earnings per share for the S&P 500 (Q3 and Q4 2022 and Q1 and Q2 2023) are estimated at $232. Based on Friday’s close, this comes to a multiple of 16.7. The multiplier this year was as high as 21 in early January, and as low as around 16 in mid-June, so 16.7 is on the low side. The historical average is 15-17. Traders are back in the belief that profits will likely fall, so let’s take an extreme case. Let’s say future estimates are lowered to $200 — quite a haircut considering the S&P 500 printed $208.12 in earnings per share in 2021 — and are expected to hit $225 in 2022, according to Refinitiv. This would be a contraction in earnings, which would be consistent with a recession. Profits almost always shrink during a recession. Let’s also say we’re trading at the lower end of the multiplier this year, which is about $16.200 x 16 = 3200 on the S&P 500. That’s about 17% lower than where we are now. Not surprisingly, this is where a lot of bearish types like Hartnett have their estimates. This would be a 33% drop from the historic highs recorded in early January. This would be a rather dangerous bearish market. Drops of 20% or more have occurred 15 times since 1926, according to Dimensional Funds, but declines of 30% or more have occurred only seven times since then. What about 3,000, the level that Hartnett suggested investors should “sink” into the S&P 500? Take the low estimate of $200, throw in a lower market multiplier of 15, and you have 3000. A much lower multiplier with diminishing profits: This is what you call the picture of recession earnings. The bad sentiments in the real estate sector are very bleak in the real estate world as well. My wife has been a realtor for over 30 years; I’ve seen a lot of bull and bear markets in that time, but the rapid rise in mortgage rates is already calming down quickly. I’ll give you an example. She had a house for sale for $949,000 in a big neighborhood. When I put the house on the market a short time ago, 30-year mortgage rates were around 4.1%; They quickly went to 6.1%. After a few early bites, the buyers were gone. I lowered the price to $899,000 and new buyers appeared. There are many interested buyers now. what happened? 1) People shop at price levels: In the neighborhood where it was exhibiting, searching in the price range between $700,000 and $900,000 was common; 2) Higher rates were killing affordability. How painful were the high rates? Let’s just work with a mortgage of $800.00 for 30 years. by 4.1%, which is $3,865 per month. At 6.1%, it’s $4,847 per month. That means about $1,000 more per month, just 4.1% to 6.1%. Bottom line: Low mortgage rates have certainly been a factor in rising home prices for some time. Higher prices, especially when they happen quickly, will cause buyers to bid less to get the home they want.