After a massive crash caused by the covid-19 outbreak we saw the fastest recovery ever.
Currently the market is stuck in a tight range, especially if we look at the S&P500.
The Nasdaq and as good as all technology based stocks writing a whole different story and currently it looks like nothing can stop tech, even if this creates a massive bubble and this kind of aggressive surge in price never was healthy. But it is what it is and the market doesn’t care about what we think, it’s about how we deal with the circumstances.
Now we’re going into a new earning season with completely new expectations by all investors out there. But what is actually the expectation of market participants at the moment. Good question. Let’s start with a graphic.
graphic by earnings whispers
This is quite an impressive chart. They compared the price of the stock PepsiCo with their earnings estimates. Price bottomed out in the middle of march and started a new rally, while the EPS tumbled further on and didn't even bottomed out yet. But the price of the stock didn't even care. Why? Cause the market is driven by a completely different story.
And this isn't an exception, it is the norm, cause this chart stands representative for the whole broader market right now. But here is the story that drives the market.
The whole truth is different
At first we have to accept that the market has itself completely decoupled from the real economy. And this isn't even hard to see. Rising numbers of infections and worsened EPS expectations getting followed by a rising general market.
On the other hand it looks like there is something like tailwind or a limit down which was given by the action of the central banks and especially the FED.
And the market has big hopes on medical treatment like "Remdesivir" and a fast vaccine development to prevent further outbreaks. So actually we see that hopes are weighted more than the reality. But here it comes. That isn't a new thing. The market has long ceased to value companies at their real value. Of course now P/E ratios are higher than ever before, but this could be the new norm or the beginning of the end.
We also see a divergence between the broad market and the technology sector, i.e. S&P vs NASDAQ. Tech is currently becoming increasingly important, which will definitely result in long-term development.
And what nobody is talking about anymore are the unresolved Brexit uncertainties, a very likely failure of a trade agreement and China / USA trade wars.
But momentarily the market development is more about long term expectations and hopes for more stimulus if the economic situation worsens. And these news are mostly positive to read.
The whole truth is that we don't know what will happen in the next months and quarters. But what we know is that we have to deal with both scenarios. Let's say even bull/bear or even a sideways market.
Trade what you see, not what you think and be safe!