Here’s when stock prices might bottom and two shares already rising fast

UK markets have reached oversold territory once again, argues one analyst, who discusses when a sustainable stock market recovery might begin.

Value is emerging in UK stocks, a City broker said today after it weighed up the likely impact of expected earnings downgrades on share prices heading into the year end.

Liberum believes current estimates for earnings per share (EPS) in the FTSE 350 index are overly optimistic and are likely to drop significantly in the coming months.

Based on current share prices, it notes that if earnings are 25% below these elevated forecasts, the FTSE 350 index would be on a price/earnings (PE) multiple of 12.4 times.

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This compares with today’s PE of 9.9 times and is still significantly well below the 10-year average of 14.5x and the five-year average of 14.2x.

In fact, earnings per share would need to be downgraded by about 35% before valuations at current index levels are no longer cheap versus 10-year averages.

Liberum said: “Or to turn it around, while we expect large EPS downgrades, index levels should not drop nearly as much, and we might well be approaching the bottom of the market in the next three to six months.”

It said its findings were not just the result of too high EPS estimates for FTSE 100 companies. In the FTSE 250, the PE ratio with 25% lower earnings per share would still be in line with the five-year average of 17.5 times.

Liberum added: “UK markets have reached oversold territory once again. Together with a market that is about 5% too cheap compared to macro fundamentals, a short-term bounce is possible, but will likely not be sustained for long.”

Recession fears mean the FTSE 250 index has lost a quarter of its value this year, compared with a fall of 6.5% for the FTSE 100 as the top flight benefits from its exposure to energy and defensive stocks.

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The UK-focused second tier rallied 3% yesterday as cyclical sectors benefited from a cooling in expectations for future interest rate rises, although this boost has proved to be short-lived after a fall of 183 points to 17,638 by lunchtime today.

In the FTSE All-Share, Hyve Group (LSE:HYVE) and Topps Tiles (LSE:TPT) have been trading close to their low points for the year, but surprised on the upside today following better-than-expected trading updates.

Events and exhibitions group Hyve surged 5.6p to 55.6p as it said the speed of recovery from Covid disruption has surpassed expectations.

The positive trading momentum has continued at the start of its new financial year, with forward bookings of approximately £68 million compared to £50 million this time last year.

Uncertainty around running events in China remains, but the former FTSE 250-listed company has seen the relaxation of Covid-related rules on a region-by-region basis, and currently plans to run a full schedule of events in the country. China represents less than 10% of revenues.

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Numis Securities, which recently gave Hyve a “buy” recommendation, said business-to-business events had defensive attributes based on the potential for exhibitors to focus on lead generation and sales orientation.

It added: “Operators have moved on since the financial crisis and Covid, with more focused larger event portfolios, and additive digital strategies.”

Analysts at Citi have a target price of 210p, noting that today’s reassuring update had ticked a second box for concerned investors after Monday’s debt refinancing worth £135 million.

Topps Tiles, meanwhile, said fourth quarter like-for-like sales were 1.2% lower in the three months to 1 October against tough “re-opening” comparatives the previous year.

The performance means a second successive year of record annual sales, with profits now likely to be towards the top end of the £13.8 million to £15.4 million consensus.

Liberum, which has a target price of 100p, said: “The strength of the core Topps Tiles brand and the benefits of the increasingly balanced, omni-channel model across trade and retail have come to the fore against a tough backdrop.”

Shares initially rose 5% but later fell back to near their opening mark as attention turned to the uncertain outlook for the new financial year.