The US stockmarket is weaker than it looks

America’s S&P 500 is now up 5% for the year. But the gains are by no means evenly spread and there are many more losers than winners.

Onwards and upwards. America’s S&P 500 surpassed February’s highs last week, wiping out its pandemic losses. It is now up 5% for the year. The MSCI World index came within 1% of its February record early this week. Yet the new peaks obscure a market where the winning stocks and sectors have soared while many others remain under water, creating a “K-shaped” recovery chart. 

More losers than winners

Surging US technology valuations have been the cornerstone of the stockmarket’s unlikely recovery. The collective valuation of just five companies (Apple, Microsoft, Amazon, Alphabet – Google’s parent company – and Facebook) now eclipses Japan’s entire Topix index, say Richard Henderson and Eric Platt in the Financial Times. Yet the average S&P 500 stock is still 28.4% below the pre-pandemic peaks. 

The gaping chasm between the haves and have-nots raises the threat of “increased regulatory and tax headwinds” for big US tech companies, writes Rupert Thompson of Kingswood. Yet their recent success reflects genuine “secular tailwinds” as the world goes increasingly online. And tech valuations are “still nowhere back to the highs” of the 2000 dotcom bubble. Valuation has become a tricky business, though, says Buttonwood in The Economist. The usual gauges of a market bubble, such as price/earnings ratios, are not much use because of sharp quarter-to-quarter Covid-19 disruptions. The US Federal Reserve’s role in backstopping markets has further distorted the usual metrics, leaving investors to look for anecdotal signs of “irrational exuberance”. There are plenty around: witness the way investors eagerly snapped up shares in bankrupt Hertz in June before regulators intervened. 

It’s not just the Fed

There is now an “utter disconnect” between equities and economics, says Liam Halligan in The Daily Telegraph. Against a backdrop of mass unemployment and “commercial carnage”, stockmarkets everywhere have bounced strongly off the March lows. The culprit is obvious: major central banks have served up a combined “monetary boost of well over $5,000bn” in five months. The result is asset price inflation. It’s not so simple, says Morgan Stanley. If central bank stimulus alone drove stock valuations, then you would expect markets to rally whenever monetary policy is loosened. But our research shows that rising or falling purchasing manager surveys, a measure of real economic sentiment, are a more decisive factor determining whether shares rise or fall. This holds true across different countries. Take Europe and Japan, where central banks have been buying up assets for five years, but stocks have gone sideways. “Fundamentals matter.” 

Still, markets are suffering from an “overdose of optimism”, says Nils Pratley in The Guardian. Even if you think they are betting on an eventual V-shaped recovery, any sensible investor would demand a “margin of safety” given the evident risks. Yet US stocks are priced for perfection. As James Montier of GMO puts it, “the US stockmarket appears to be absurd”.

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