Many people were surprised that the stock market did not fall further, given the geopolitical situation.
A war in the Middle East. Oil prices suddenly increased by 60 percent. Energy market supply-demand dynamics may be disrupted for a while. Gasoline prices quickly rose above $4 per gallon.
Why have we seen such a regular sell-off in the stock market? Why was the S&P 500 only 9% off its highs? Why haven’t we seen a single 2% drop day?
The New York Times has an article this week that essentially asks these questions:
Many investors share these sentiments.
The stock market is currently out of touch with reality.
How can we fire back? new all-time highs So quickly when energy markets are still in turmoil and the situation in Iran remains unresolved?
In a word — earning.
Annex A The chart of the week shows that moving stock market returns tend to follow year-over-year forward earnings growth:
Earnings expectations are actually accelerating:
We went through a situation where stock prices were falling while earnings estimates were rising. This was especially true for the largest sector in the stock market.
Graphic Kid Matt There is some excellent data showing the change in valuations with the change in prices during the small correction we just had:
Prices experienced a modest correction but valuations fell sharply as the fundamental outlook improved too much.
There are numerous variables affecting markets at any given time: economic data, investor psychology, earnings, geopolitics, investor flows, fiscal/monetary policy, world events, etc.
However, the fact that earnings expectations remain so strong despite the war and rising energy costs is the simplest reason why this market is so strong. to do It actually makes sense.
You must remember that the stock market is heartless. It’s an amoral and apolitical profit-driven machine that exists to make you tear your hair out from time to time trying to figure out what’s going on.
Of course, this is all very short-term in nature.
Could earnings estimates be too optimistic about the war? Definitely. This could still be a problem if this situation drags on and energy markets suffer significant damage in the long term.
Is AI more important than geopolitics right now? It seems so.
Does the stock market always follow fundamental data? No. Prices and bases can and will vary from time to time.
Is the stock market ever wrong about implied expectations? Yes. There is no perfect track record in financial markets.
But the stock market is right much more often than the experts who try to predict it.
When the stock market rebounded in April 2020, when the pandemic situation was as bleak as it gets, no one believed there were bottoms.
The stock market was right.
When inflation was 9 percent and everyone was convinced that a recession was almost certain, no one believed there were bottoms.
The stock market was right.
Duality Research This week I wrote an article about the stock market today, not just about what things might look like in the future. This quote was right on the money:
Remember that the stock market’s job is to make you say “this doesn’t make any sense.”
The stock market isn’t always right, but it is right more often than most of us who try to predict what will happen next.
Michael and I talk about struggling with the stock market, earnings, and much more in this week’s Animal Spirits video:
Subscribe Compound so you won’t miss any episode.
Further Reading:
Stock Market Heartless
Now here’s what I’ve been reading lately:
Books:
Podcasts:
This content containing security-related opinions and/or information is for informational purposes only and should in no way be relied upon as professional advice or endorsement of any practice, product or service. No guarantee or warranty can be given that the views expressed herein will apply to any particular case or circumstance and should not be relied upon in any way. You should consult your own advisors on legal, business, tax and other related matters regarding any investment.
The comments contained in this “post” (including any associated blogs, podcasts, videos, and social media) reflect the personal opinions, perspectives, and analyzes of Ritholtz Wealth Management employees making such comments and should not be considered the opinions of Ritholtz Wealth Management LLC. or its respective affiliates or a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.
References to any security or digital asset or performance data are for illustrative purposes only and do not constitute investment advice or an offer to provide investment advisory services. The tables and graphs contained therein are for informational purposes only and should not be taken into account when making any investment decisions. Past performance is not indicative of future results. The content speaks only from the date specified. Any projections, estimates, estimates, targets, expectations and/or opinions expressed in these materials are subject to change without notice and may differ from or contradict views expressed by others.
The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives compensation from various organizations for advertising on affiliate podcasts, blogs and emails. The inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or Ritholtz Wealth Management or any of their employees. Investments in securities involve the risk of loss. For additional advertising disclaimers, see here: https://www.ritholtzwealth.com/advertising-disclaimers
Please see the descriptions Here.
