Understanding the Current Strong Market Trend By Investing.com

Understanding the Current Strong Market Trend By Investing.com
Understanding the Current Strong Market Trend By Investing.com

Market analysts have consistently underestimated the strength of the current upward trend in stock prices, strategists at Alpine Macro said in a recent report. Despite widespread disbelief, the global investment firm believes stock prices are likely to continue to outperform expectations, driven by broad-based increases in corporate profits and a strong economic environment.

At the midpoint, the value of the S&P 500 index is above the highest estimates provided by Wall Street experts for the year 2024. This positive trend indicates a significant gap between the actual performance of the market and the forecasts of financial analysts, with analysts’ price targets being at a record distance from actual price levels in recent months. Investment models reflect this misjudgment, with investors not fully investing in stocks during this period of rising prices.

Alpine Macro puts forward several reasons to explain the misinterpretation of this bullish trend in the stock markets. First, the widely expected economic slowdown did not occur.

“There has been a reduction in economic activity, in line with tighter financial conditions, but this has led to lower profits in some industries rather than a broad-based economic slowdown,” the strategists said.

In addition, very large technology companies have emerged as a distinct group, less affected by general economic changes, which has allowed the overall index of large U.S. companies to continue to rise.

With this development, corporate profits have grown faster than expected. The persistent positive factors driving these very large technology companies have attracted investment from around the world, which has pushed up overall company valuations.

A notable aspect of the U.S. large enterprise market is the rise of companies with unprecedented quality, profitability, and consistent growth. These companies are largely insulated from the typical ups and downs of the business cycle because they are more reliant on widespread technology adoption.

“Their minimal reliance on physical assets also makes them less affected by interest rate changes,” the firm observes.

“In this time of great uncertainty, we believe it makes sense that most of these very large technology companies are highly valued by investors looking for reliable sources of quality growth,” they added.

The current upward trend in stock prices is also supported by broadening corporate earnings growth. Industries that have survived periodic economic downturns are now able to see their sales stabilize and their profit margins increase.

Looking at past trends, profit margins tend to recover quickly after the lowest points in economic cycles, suggesting potential for further growth.

“Our corporate earnings forecasting model estimates earnings of about $59 in the second quarter and about $240 for the year based on annual projections,” the report said. “A more detailed estimate, which combines earnings data from each company, indicates an even more optimistic forecast of about $250 for this year.

Alpine Macro strategists believe that a very optimistic view of stock prices includes the possibility of a “catch-up” in valuations for the market as a whole, in order to align them with the high valuations of the major mega-companies.

They illustrate what the value of the S&P 500 index could be if the rest of the market experienced the same increase in valuations as the top 7 companies since 2023. If this equalization of valuations were to occur, the estimated value of the S&P 500 would be around 6,500 instead of its current value.

“Of course, this is a speculative scenario,” they warn.

Their reasonable valuation model, which takes into account various fundamental and cross-sectional data, suggests a fair price-to-earnings (P/E) ratio of 20 times. If we apply this ratio to the entire index, we get a market value of 5,200. However, if we apply this ratio only to the rest of the index while keeping the valuations of the very large technology companies unchanged, this would lead to a market value of 5,700.

“Based on our earnings growth projections, we believe this is a reasonable medium-term target,” the strategists conclude.

This article was produced and translated with the help of AI technology and reviewed by an editor. For more information, please see our terms and conditions.

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