The next session on Wall Street and the next records that we can observe on the US stock market. The scenario with every session with a new record has already been repeated many times during a bull market in the US over the last decade and is repeated. S&P 500 (US500 on the Conotoxia platform), Nasdaq 100 (US100) and Dow Jones (US30) set new historic highs.
The current bull market on Wall Street seems to stand out from the others, above all because interest rates have never been at such low levels as now. Unconventional monetary policy tools have never been introduced on such a scale. As a consequence, the valuation of other assets, including those considered as potentially more secure deposits or bonds, have nothing to compete with shares. An interest rate of 2 or less percent with inflation above 1.5 percent makes such investments very unprofitable (real rate of return barely above zero). Other markets are not very competitive in relation to the US stock market.
However, it's also not that the money flows towards shares without coverage in results. Since the financial crisis, which has not only affected the United States, American companies have increased their expansion, which has led to a significant increase in their profits. From the end of the financial crisis to the end of the second quarter of this year, corporate profits in the United States doubled. Thus, an increase in share prices occurs along with an increase in corporate profits. That is why, despite such a significant nominal increase in prices, there is no bubble. What's more, investors expect a further increase in profits, as evidenced by the forward PE ratio around 18.5 for the S&P 500 index.
It seems that the current trend could be interrupted by much higher interest rates than those currently observed. We are talking about an increase of 4-5 percent or a decrease in corporate profits because without them it is difficult to count on further increase in valuations on the stock market without inflating the bubble. Nevertheless, without a significant increase in inflation globally, we are unlikely to be able to count on a significant increase in interest rates, and in turn, the expectation of signing a trade agreement reduces the chance of a decline in corporate profits.
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.
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