Are US stock markets complacent right now? A recent New York Times headline asked why the stock market “makes no sense right now”, highlighting the apparent disconnect between geopolitics, oil prices and equity indices at record levels.
Since then, markets have continued to digest oil prices surging to a four-year high, ongoing disruption around the Strait of Hormuz, and renewed inflation signals in bond and currency markets – without any corresponding break in US stocks, which have held close to all-time highs.
A sceptic who sees this as indicative of complacency might also point to the Vix, Wall Street’s so-called fear index, which has fallen from above 30 in late March to as low as 17 – below historical norms, despite renewed Iran war risks.
Still, the idea that investors are somehow ignoring war risks ignores two points. One, European stocks have come under pressure in recent weeks, which doesn’t suggest a uniform easing of risk sentiment.
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Two, while US indices are at all-time highs, valuations have actually contracted due to surging earnings.
Forward earnings estimates for the S&P 500 are now up 22.9 per cent over the past year, notes Ritholtz Wealth Management’s Matt Cerminaro.
And the breadth of that growth is notable. Eight of 11 sectors are expected to deliver double-digit earnings growth over the next 12 months, with three expected to exceed 25 per cent. Unsurprisingly, the technology sector leads the way, with earnings expected to rise by a third.
In other words, we’re not witnessing “some form of euphoria” or “animal spirits”, says Cerminaro. Rather, “cold hard profits” mean that indices have earned their gains.
