Broker Check

Can There Be Too Much of a Good Thing in Markets?

on February 8, 2021

Is there such a thing as too much of a good thing in markets? We’re going to find out.

Stocks rebounded from the GME short squeeze drama of two weeks ago and hit new all-time highs on a familiar cocktail of (1) More stimulus (an additional $1.9ish trillion stimulus plan will become law in about six weeks), (2) Vaccine optimism (JNJ will get approval for it’s single-dose vaccine on February 26), and (3) A generally stable economy (economic data was solid if un-spectacular). As such, stocks surged to all-time highs, exactly as we would expect them too.

In addition, the Q4 2020 earnings season has been much better than expected. With virtually all the systemically important companies posting strong earnings, and over 80% of companies beating expectations (well above the normal averages), the expected 2021 S&P 500 EPS is likely now between $175-$180, while the 2022 S&P 500 EPS has risen to $205, meaning that on a 2022 basis, the S&P 500 is trading at 19X 2022 earnings, and 22X 2021 earnings. Point being, valuation, by itself, isn’t enough to end this rally (there’s legitimately more room to run).

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