Four in five money managers believe that the stock market is too expensive as per the American Global Fund Manager Survey, the most since the survey began in 1998. After a rapid recovery from March’s sell-off, the market optimism seems to be fragile.
U.S stocks rose on Wednesday following the positive trend that started last week. Nasdaq-100, the market index made up of the 100 largest non-financial companies in the Nasdaq stock market, ends at a record high offsetting concerns about further lockdowns. Similar gains were observed as well on the S&P 500 and Dow Jones. The biggest movers were the technology companies with Apple Inc and Microsoft Corp providing the boosts to the Dow Jones and S&P 500, while Amazon.com had its fourth record closing high in the last 10 days helping the Nasdaq to outperform the other two major indices. In the middle of a pandemic, the markets seem to have shaken off any negative news and could move to a correction or in some cases to first-time highs. Could although, the recent gains be explained? Or could it be just an overreaction to some positive economic data?
A great metric for investors to decide on a stock price valuation is the price to earnings ratio. The P/E ratio is very simple to calculate, which is the result of dividing the earnings per share of the company from the current share price. A high P/E ratio could mean that a company’s share price may be expensive. With that in mind, checking the forward P/E ratio of the major U.S indices we can observe a noticeable upward trend, for example, Nasdaq’s current P/E ratio seems to be close to 32 while a year ago it was about 24.5. The sharp increase in valuation in the U.S stock market is not something that investors would have bet their money on, especially in the middle of a pandemic.
According to the big players, the stock market is overvalued, and it seems that some financial metrics agree with them. Therefore, what is driving U.S corporations to new highs, is it hope? Was the technological sector unaffected from this crisis? The questions are many and as we come into earning season we may get some answers.
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