The stock market just gave investors something they haven’t really seen since the start of the Iran war: a chance to buy at a discount.
The Vanguard S&P 500 ETF (NYSEMKT: VOO) has fallen roughly 6% from its October high through the close on Nov. 5 following a sharp post-election sell-off. For investors who thought stocks were getting too expensive, this could be a real opportunity.
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But then there’s the issue of whether investors are ready to take advantage of it. Are they going to view it as a chance to buy on sale given their long-term focus? Or are they going to panic and look at selling stocks instead of buying?
If you’re a long-term investor, this could be a buying opportunity you haven’t seen since April.
Why stocks are suddenly under pressure
The midterm elections gave Democrats control of both chambers of Congress, raising some questions about the future of the artificial intelligence (AI) boom.
Will there be efforts to slow the level of innovation? Will there be potential restrictions on data center construction? Will it be more challenging to spend billions of dollars to expand AI infrastructure?
That’s a legitimate short-term concern for Vanguard S&P 500 ETF investors. Mega-cap tech stocks have unquestionably driven the market’s gains over the past few years. By some measures, their valuations leave little room for disappointment. The election may have simply been the catalyst to let investors realize those fears.
The strongest argument for buying VOO
Corporate earnings growth hasn’t yet given investors much reason to get out of stocks. According to FactSet, S&P 500 companies were on pace to deliver roughly 30% year-over-year earnings growth in Q3. That growth rate is important because it’s currently helping offset several other potentially negative factors.
Inflation remains elevated. Oil prices are still above $90 per barrel. And long-term Treasury yields are putting pressure on balance sheets and equity valuations. Without strong earnings growth, the market would have a much harder time justifying its current prices.
For now, however, earnings are providing that support. The risk is that AI spending slows and earnings expectations follow. That’ll be the most important factor over the next couple of quarters. But we have yet to see broad evidence that a slowdown is occurring.
