The current bull market in equities seems to be unique, because it is unprecedented in terms of the scale and speed of the rebound after the plunge in March last year. Indexes in the US and Europe are hitting record highs, so let's take a look at potential valuations.
Both the S&P 500, Dow Jones Industrial Average, Nasdaq 100 and the German DAX reached all-time records last week. Index rises are commonly explained by central bank money creation, massive excess liquidity in the financial system, expectations for economic growth and rising inflation. Moderate inflation could be good for stock prices because it means nominally higher corporate profits if they do not cut margins. This translates into improved company metrics, which in turn translates into stock prices. But more and more investors seem to be paying attention to valuations. Both current ones and future ones.
As reported by the Wall Street Journal, the price-to-earnings ratio for the Dow Jones Industrial Average index has reached 30.38. The same ratio for the Nasdaq 100 is already 39.98, and for the S&P 500 it has reached 46.92. These values seem historically high, but that's mainly because companies' earnings deteriorated last year, and the market has already started pricing in an improvement in 2021. From there, it's better to look at the forward index, which is at 21.02 for the DJIA, 29.72 for the Nasdaq 100, and 23.49 for the S&P 500, the WSJ reports.
These values, with the U.S. 10-year bond rate at 1.6 percent, no longer seem so exorbitant. Nevertheless, the market may start to feel some concerns. We're talking about VIX fear index contracts and institutional investor positioning. According to CFTC data, the share of long positions on the VIX contract has been increasing for several weeks while its value has been decreasing. This could mean that larger investors are becoming concerned about falling indices and are hedging their positions in the equity market. This in turn may show that the belief in a steady trend without major corrections since March 2020 may be shaken and it may be worth being more cautious.
Today, U.S. index futures do not appear to have much volatility as investors await the next round of corporate earnings for further information on the private sector recovery. Abbott, Johnson & Johnson and Procter & Gamble are scheduled to report before the start of the Wall Street session, while Netflix is expected to release results after the session.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
77.46% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade this news from Conotoxia Ltd. platforms
Go to your account
