Those who follow developments in international markets, note an impressive, resistant to any unpleasant news – economic, corporate, geopolitical – rally in stocks. The US, Europe, Japan, India saw the indices on a combined continuous upward trajectory, breaking a series of records. A global party is underway – even if the background music is war marches and precision blues.
THE S&P 500 – the most representative indicator of Wall Street, which also gives direction to other markets around the world – running. It operates at a historically high level, which strengthens to 60% since 2022. The euphoria around technology (with an emphasis on the achievements of artificial intelligence) is the main fuel of this race. So not a few do comparison to the dot.com bubble era.
There are many differences in that period 24-25 years ago. But that doesn’t mean the party lasts forever. So what is it that shortens it?
The bells are for harsh correction
Its analysts are still very new Goldman Sachs they published a note under the title “Summer Blues”where they warn that share prices rose to unreasonably high levels, especially compared to bond performance, despite the fact that economic risks and corporate profits have increased. So the correction will be imminent and painful.
At the same wavelength and JPMorgan Chase, it refers to the overly aggressive actions of buyers based on unrealistic estimates of corporate growth and profits. “Such exaggerations are likely to be followed by harsh corrections,” warn investment house analysts.
A correction in the order of 10% was seen from his side by Mike Wilson organ Stanley, which a few months ago argued for the stocks to remain.
One indicator that analysts often look at is the cyclically adjusted price/earnings ratio. It’s about him called the cape index, WHO increased to 36. The only time it is higher is towards the peak in the dot.com bubble and in 2021. Both times free fall ensued. In India valuations have soared to even worse levels. In Europe and Japan they are relatively moderate, although significantly higher than the average in recent years.
In such an environment what would signal the transition from rally to liquidations? “A change in investor sentiment,” Goldman warned, would be enough. And what can cause sudden mood swings? There are two major fears.
The two great fears
The first has to do with a geopolitical shock. A rapid deterioration of developments in Ukraine or the Middle East front – something that will lead to regional or even global conflict. A China-Taiwan conflict, which will bring the USA into a confrontation with another superpower. An ignition between the West and the forces that challenge it.
The second has to do with potential financial shock. This is where the eyes and anxiety are focused in the so-called shadow banking sector, which has grown dangerously large, but is not subject to the same strict supervision and requirements as traditional banks.
“A lot of people I talk to are very worried,” Torsten Schlock, chief economist at Apollo Global Management, told the Economist. “The bubble is getting bigger and bigger. And what happens is the first negative development we see everyone running towards the exit door at the same time. ” Finally turn off the.. lights.