Ominous crash predictions have been flooding the market commentary, with numerous writers on Seeking Alpha amplifying the message. These doomsday forecasts rely on technical analysis, global geopolitical tensions, inflationary pressures, and concerns about overvaluation. However, upon closer examination, it becomes apparent that these risks may not be as dire as they seem. In this article, we delve into each of these factors to provide a clear and comprehensive understanding of why the stock market remains resilient.
Dissecting Technical Analysis: Its Limitations and the Bigger Picture
Technical analysis, a method that interprets historical stock price and volume data to predict future price movements, has gained popularity among traders. However, relying solely on technical analysis to make investment decisions may not be the most profitable strategy. While there are some concerning signals across various timeframes for the S&P 500, technical analysis fails to capture the full complexity of stock market dynamics. In fact, it often leads to subjective judgments and varying interpretations among analysts. Rather than fixating on short-term fluctuations, it is more useful to acknowledge the consistent uptrend and exponential growth of the S&P 500 supported by moving averages.
The Middle East Conundrum: Unlikely Catalyst for a Market Crash
Market commentators frequently cite the Middle East conflict as a potential driver of market downturns. However, historical analysis reveals that such geopolitical tensions have not resulted in prolonged market crashes. Instead, U.S. equities tend to rebound within 12-18 months following these conflicts. While it is crucial to recognize the unfortunate impact of these conflicts, from a market perspective, the concerns should be seen as tail-risks rather than indicators of an imminent crash.
Inflation and Interest Rates: An Evolving Landscape
Markets are forward-looking entities that prioritize the rate of change. Although inflation and interest rates have been areas of concern, recent data suggests a favorable trend. Core inflation is trending towards a manageable 3% YoY growth, while wage growth is nearing the 50-year historical average of 4% YoY. These easing pressure points contribute to a positive outlook for interest rates, as supported by JP Morgan’s economic research. Investors need not fear a market crash due to interest rate hikes, especially considering the aggressive and unexpected path seen in 2021.
Assessing Market Valuation: A Balanced Perspective
One popular argument for an impending crash is the perceived overvaluation of the broader stock market, with the S&P 500’s projected 2024 P/E ratio approaching 18x. However, a closer examination reveals that U.S. equities’ valuation is relatively in line with historical metrics when considered as a whole. By comparing major asset classes and styles, the data suggests that stocks are reasonably priced, with any premium associated with growth being offset by discounts in small-cap and value stocks. Additionally, it is important to note that the earnings growth of the dominant tech companies, known as the “Magnificent Seven,” remains robust.
- Microsoft Q3: +24% YoY
- Google Q3: +25% YoY
- Tesla Q3: -52% YoY
- Meta Platforms Q3: +143% YoY
- Apple Q3: Analysts project +11% YoY
- Nvidia: Q3 performance not yet reported, but previous Q2 showed an extraordinary +1,263% YoY. Q3 is expected to deliver similar results.
- Amazon Q3: +348% YoY
Collectively, the operating earnings of these companies have surpassed a 20% YoY increase, outpacing the overall 11% gain of the S&P 500. This strong earnings growth provides further evidence against the notion of an imminent market crash.
Investing in equities carries inherent risks that should not be underestimated. It is crucial to consider four key risk factors:
- General market volatility and sentiment-induced price swings are inherent characteristics of equities.
- Economic uncertainty remains, with varying estimates of a U.S. recession in 2024. While a recession may impact valuations, it is unlikely to trigger a crash.
- Some sectors may face specific vulnerabilities that can impact performance. Understanding industry dynamics is essential for prudent investing.
- Investing in the stock market often requires a long-term commitment to realize significant returns.
It is worth noting that sentiment in the stock market is always prone to excessive reactions both on the downside and the upside. Investor sentiment should be taken into consideration while analyzing market trends.
While this article presents a positive outlook for the stock market, it is essential to remain vigilant. Monitoring inflation and interest rate dynamics can provide valuable insights, as unexpected changes may warrant a revision of the current assessment. Investing in stocks should be approached with a long-term perspective, keeping these factors in mind.
Despite the growing chorus of crash predictions, there are compelling reasons to view these concerns skeptically. Technical analysis limitations, historical precedents in the Middle East, favorable inflation and interest rate trends, and a more nuanced evaluation of market valuation all point to a market that is not on the verge of a crash. It is important to stay informed and maintain a balanced perspective amidst the noise and volatility of the stock market. In conclusion, investing in stocks remains an attractive opportunity, and those betting against this positive outlook do so at their own risk.