Despite the bullishness of stock markets over the last decade, there are signs that investors could be overlooking certain aspects associated with modern stock valuation techniques. Whether it’s ignoring fundamental analysis, focusing too much on technical analysis or disregarding industry-level indicators which can provide an in depth insights into market conditions, many traders and investors are overlooking crucial market data that may impact their investments in 2020.
In this blog post we will take a look at some of these vulnerabilities and explore how they might affect overall profits made through trading S&P 500 companies this year.
We’ll discuss what the dangers of myopia are, identify potential financial risks that come along with shortsighted tactics and offer up strategies for future-proofing your portfolio from further loss exposure due to unchecked optimism.
Read on to uncover the shortcomings of stock market bulls and gain insight into how you can get ahead before these traps start taking a chunk out of your returns!
Recent Wall Street predictions regarding the S&P 500’s single-digit earnings growth for the 2023-24 period are facing criticism from Morgan Stanley Wealth Management, who deem them “woefully myopic” and believe that the U.S. stock-market benchmark’s historically high operating margins can be risky.
According to Chief Investment Officer Lisa Shalett, although 2021 saw a peak in margins which have since decreased slightly, this does not necessarily make them immune to a possible economic downturn.
The current operating margins for companies on the S&P 500 index appear to remain “rich”, with Shalett stressing that it is necessary to consider the historical context when analyzing the situation and predicting future profit gains. It remains to be seen if her warnings will be heeded and if her expectations of margin mean reversion will come to fruition in the near term.
Morgan Stanley’s Wealth Management note dated Jan. 9, 2023 warns that high inflation and corporate pricing power have potentially distorted S&P 500 operating margins.
Historically, the operating margin has rested at 13.1%, over one full point higher than the pre-pandemic 10.2% and the 9.4% rolling 10-year average.
As of today, the margin sits at 11.6% to reflect current market conditions. To address rising inflation levels, Federal Reserve President Mary Daly said that she expects interest rates will be increased above 5%.
Although unconventional, this approach may help guide inflation downward, which would ultimately restore balance in the markets to ensure an accurate representation of normal operating margin numbers going forward.
While the S&P 500 earnings for this year are projected to drop significantly from last year’s figure, Morgan Stanley’s chief U.S. equity strategist Mike Wilson believes that there is room for a positive outlook given current estimates in 2023 suggesting only a 3.6% increase in earnings per share.
Lori Shalett, head of investment and portfolio strategies at Merrill Lynch Global Wealth and Investment Management, advised investors to adjust their profit expectations accordingly and work on diversifying their portfolios with more fixed income investments, value stocks, dividend-paying global stocks, early cyclicals, enterprise technology and EM equities as a means of hedging against any potential slowdowns or recessions ahead.
Monday’s stock market activity saw the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite move in different directions: while the S&P 500 edged up 0.1%, the Dow slipped 0.3% and the Nasdaq climbed 0.9%. Analysts attribute this strange mix of performance to “soft-landing hopes” prior to Thursday’s consumer-price index report. With news that inflation had decreased in November together with rising stocks, investors have become optimistic about the current state of the economy despite the uncertainty surrounding Brexit and U.S.-China trade negotiations. It remains to be seen whether these soft landing hopes will carry through after this week’s report.