New highs in the stock market promise only a tougher fall

13 Jan 2020

Attempts to grow the US stock market in 2020 are increasingly reminiscent of agony. The maximum in the history of the stock market US overvaluation, a sharp increase in the level of geopolitical tensions in the world against the background of US military confrontation between Iran and the threat of a global recession and a general deterioration in the world economy as the trade wars of the results - any of these factors would be enough to start a full-fledged correction in normal conditions.

But this is not a complete list. Today we propose expanding it to further emphasize the inconsistency of what is happening.

The increase in stock prices of companies, in theory, should be a direct result of improving their financial results. In theory, but not in practice, the exact opposite is happening here and now: the financial results of American companies are rapidly losing their upward momentum, but the growth in stock prices is accelerating.

Here are a few numbers from Refinitiv data to confirm our words. The corporation’s profit from the S&P500 index in 2018 increased by 23%. Recall that in that year, the S&P 500 index fell by 6%. In 2019, profit growth was only 1.1%, but the S&P 500 index added 29%. That is, prices in the stock market are completely divorced from reality.

When this was the last time (meaning the value of the forward PE indicator in the region of 18), the market corrected itself quite sharply (this was in late 2017 - early 2018).

Considering how events are developing in 2020 (an armed conflict between the United States and Iran, which entailed, among other things, a sharp increase in oil prices, and hence an increase in the costs of US corporations), one can hardly expect a sharp improvement in the financial results of companies.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to be corrected. And the scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).