This article was written by Nicholas Mitsakos : Chairman and CEO at Arcadia Capital Group.
The Market: intense volatility and perhaps detaching from reality.
There are warning signs that the stock market is transitioning from some form of reality to misguided euphoria. The S&P 500 is up almost 10% in the last 30 days. However, this broad optimism doesn’t seem to be matched by many forms of fundamental reality.
Earnings are barely moving, and profit margins are under pressure from higher wages and rising product costs. However transitory one imagines supply chain constraints and lack of available workers, the situation has certainly extended much further than most predicted.
The S&P 500 is now trading at 21.5x forward earnings, with the top five stocks (that comprise more than 15% of the total index) trading for an average of 30x. This is historically high and has been justified because of historically low interest rates (lower discount rates, and therefore higher present values). That may have been the case, but more and more, bond yields seem to be rising and could easily rise much more. That certainly would undermine the value of future profits.
All this should bring down market multiples, but instead, market multiples are expanding. This is where reality is becoming euphoria. Adding to this overall euphoric is enhanced stock trading through retail platforms such as Robinhood, etc. This is driving up stock demand, and thus prices.
Market corrections tend to be unpredictable, begin slowly, and then accelerate quickly. While profits are mostly earned over time, losses tend to be sudden and dramatic. Expect further intense volatility and the euphoric drumbeat to slow at some point, perhaps soon.