At present, a 5% increase in Apple’s share price can drive the S & P 500 index up 0.35%. Instead of representing the largest 500 companies in the United States, the S & P 500 is heavily influenced by a small number of technology stocks. It also means that the performance of the index will be easily affected by the price correction of these large stocks.
On Monday local time, tech stocks drove the S & P 500 and the NASDAQ to record highs. The Dow Jones industrial average is back at 28000 after six months.
By the end of the day, the Dow rose 378.13 points, or 1.35%; the NASDAQ rose 0.60% to 11379.72 points, and the S & P 500 index rose 1% to 3431.28 points, breaking the 3400 mark for the first time.
Driven by the strong upward momentum of large technology stocks, the S & P 500 index and the NASDAQ index have been up for five weeks. Apple shares closed up 1.2% above $500. Google and Facebook also set new record closing highs, rising 0.6% and 1.6% respectively, and Amazon rose 0.7%.
The impact of technology giants on the stock market is becoming more and more obvious. While attracting investors to catch up, it also causes some investors to worry about the sustainability of US stocks.
Wall Street stock speculators exit
Since March, the S & P 500 index has rebounded by more than 50% since the U.S. stock market bottomed out in March. Not only has the S & P 500 recovered all of its lost land, but it has repeatedly reached new highs. The overall market value has increased by US $13 trillion, which is about 70% of US GDP in 2019.
In the face of such a sharp rebound, stock speculators have been “all rout”, have a dim exit. According to the report of Peng Bo, the current stock speculator position of American hedge funds is the lowest level in 16 years. In the face of economic recession, stagnant corporate profits and poor prospects for the presidential election, professional investors, who were originally skeptical, gave up and started buying stocks.
At the beginning of August, the average stock speculator interest rate on the S & P 500 index was only 1.8% of market value in early August, the lowest level since 2004, according to Goldman Sachs. All the major energy speculators except the energy sector have been in the lowest position in the past 15 years.
Hussein sayed, chief market strategist at fxtm fortune, told the international finance news that the rally of US stocks was unprecedented. By contrast, during the global financial crisis in 2008, the S & P 500 index took 4 years to recover all the lost land. After the Internet bubble burst, the index took nearly 5 years to complete the rebound.
Market imbalance brings risks
Mike Wilson, chief U.S. equity strategist at Morgan Stanley, said the rally was partly due to bond yields hovering near record lows. However, there are too few stocks supporting the recent record high of S & P 500, and the market situation of unilateral rise brings risks to the rise of US stocks.
Last week, apple became the first U.S. company with a market capitalization of more than $2 trillion, and its share price is up more than 70% this year.
Hussein sayed, chief market strategist at fxtm, said the S & P 500’s rise to a record high did not reflect the full picture of the bull market. So far this year, technology stocks and Consumer Discretionary stocks are up 28.6% and 23.1% respectively, while energy stocks and financial stocks are down 41% and 21.2% respectively. This is probably the most unbalanced rebound we have ever seen. Today, the market value of faamg’s top five technology stocks (Facebook, apple, Amazon, Microsoft and Google) account for 24% of the S & P 500 index. In other words, a 5% rise in Apple’s share price alone will drive the S & P 500 index up 0.35%. In short, the S & P 500 no longer represents the largest 500 companies in the United States, but is heavily influenced by a small number of technology stocks. It also means that the performance of the index will be easily affected by the price correction of these large stocks.
Moreover, from a valuation point of view, technology giants are much higher than the S & P index. “Apple, Microsoft and alphabet have expected P / E ratios of more than 30 times, Facebook slightly lower than 30 times, and Amazon’s expected P / E ratio is as high as 83 times. But if we exclude these five tech stocks, the S & P 500’s expected P / E ratio is only 20 times. Although the overall valuation level of the index does not look high compared with these technology companies, it is already the highest multiple of P / E since 2002. ” Said Hussein sayed.
Wilson said that the U.S. stock market will be vulnerable to some shocks in the future, especially the rise in interest rates, and S & P may suffer a significant correction soon.
“The over valuation of the stock market over a long period of time may be due to the support of monetary and fiscal policies. With interest rates close to zero and long-term interest rates expected to remain at current low levels, investors have little choice, which is why technology companies are so popular. However, if other sectors don’t start to catch up, it will be a very worrying signal. If low interest rates are the only reason for the stock market to soar, then the Japanese stock market should outperform other major stock markets, but that is not the case. ” Said Hussein sayed.
US stock volatility will increase
With the rise of stock price and the sharp deterioration of corporate profits, the deviation between the two has attracted the attention of the market.
FactSet, a research firm, points out that for the second quarter of 2020, the S & P 500’s mixed earnings fell by 33.8%. If 33.8% were the real decline in the second quarter, it would be the biggest year-on-year decline in earnings since the 35.4% decline reported in the first quarter of 2009.
FactSet also noted that for the third quarter of 2020, 11 S & P 500 component companies gave negative EPS guidance, and 34 S & P 500 component companies gave positive EPS guidance. But only 10% of companies gave guidance, which led analysts to speculate on the future performance of S & P 500 companies.
In addition, Wilson warned that the recent setback in the school reopening process and potentially disappointing economic data could force Congress to launch a more than expected stimulus package, which could lead to higher bond yields and a correction in US stocks.
According to US media reports, under the constant demand of the U.S. government, some schools in the United States have opened schools one after another while the epidemic situation is still grim. However, the emergence and aggravation of the epidemic situation in middle schools and universities have followed. At least 36 states in the United States have reported outbreaks on campus.
At the same time, the U.S. job market recovery prospects are poor, and the number of new jobless claims broke the 1 million mark again last week. As a result of repeated outbreaks, the number of enterprise layoffs has increased, and the activity of the U.S. labor market may be cooling down.
According to the minutes of the FOMC meeting in July, the economic recovery will depend on the control of the epidemic situation and is cautious about the economic outlook in the second half of the year, which has hit the hope of a rapid recovery after the sharp contraction of the US economy in the second quarter. While reiterating its commitment to easing policy, the Federal Reserve called on the government to increase support for fiscal stimulus.
However, at present, the U.S. Congress on the next round of fiscal stimulus negotiations are still deadlocked. Philip Colmar, executive partner of MRB partnership, a Macroeconomic Research Institute, said that twists and turns in the economic recovery or policy makers’ determination to stimulate the economy may lead to significant stock market shocks.
Macro observation of the Bank of China Research Institute points out that, based on various factors and historical experience, there is more than 10% – 15% room for correction in US stocks. U.S. stocks in the fall after the correction is expected to continue a wide range of shock. This judgment is based on four factors
First, the trend of monetary policy. If the US monetary policy easing is less than expected in the short term, the market will fluctuate and fall accordingly;
Second, in the future, the news of vaccine research and development and even the coming out of the market will become the core factor affecting the wide range of US stock market volatility;
The third is the revaluation of the plate value. With the peak of the epidemic situation and the economic restart in the future, the traditional undervalued plate may regain the upward momentum, while the emerging industries such as information technology will face the revaluation;