While millions of families in the United States feel the pinch of expensive gasoline, more expensive food and high interest rates, something is happening on Wall Road that to many seems contradictory: the stock market continues to rise. This impulse must be taken with moderation, especially if you do not know about investment issues, so we are going to explain to you the reasons behind this rally and the precautions you should take if you want to invest in stocks.
The S&P 500 index accumulates new historical records and the big banks believe that it could still grow more in the coming months. What’s surprising about the situation is that investors are betting on several factors that could keep stocks rising, even amid international tensions in the Middle East and inflation concerns. However, there are also warning signs that could change the situation quickly.
One of the main drivers of optimism is the profits that American companies reported. During the first quarter of the year, many companies reported results much better than expected. The technology sector benefited the most.
“I’ve been doing this for 25 years and I’ve never seen anything like it, it’s really amazing how high these earnings numbers are,” Jeff Buchbinder, chief equity strategist at LPL Monetary, told CBS Facts.
According to Buchbinder, Technology companies increased their profits by around 50% during the first months of the year. Normally, this growth is usually around 10%. Even outside the technology sector, many American companies posted significant increases in profits.
Part of that growth is related to recently approved tax cuts and stimuli. This has caused something unusual: Although the market is at all-time highs, stocks do not look as expensive as many believe.
Analysts often use the price-to-earnings ratio to gauge whether stocks are overvalued. In this case, although the S&P 500 has risen strongly, company profits have grown even faster. In simpler words, Companies are making more money and that helps justify the true value of their shares.
“So far this year, the S&P 500 is up 10%, forward earnings per share estimates are up 15%, and the price/earnings multiple is down 4%,” Goldman Sachs analysts noted.
That helps explain why some banks still believe the market can continue moving forward. Goldman Sachs even recently raised your projection for the S&P 500 and considers it possible that reach 8,000 points before the end of the year.
Man-made intelligence: realistic impulse or Wall Road bubble?
Another important component behind the rally on Wall Road is man-made intelligence (AI).. Many companies and investment funds are convinced that this technology could transform the global economy and increase productivity in multiple industries.
“Investors are betting that AI will transform the global economy,” said Nigel Green, CEO of deVere Crew, in an email.
For many people, this reminiscent of the dotcom bubble of the late 1990s. But some analysts believe there is an important difference: Today the leading manmade intelligence companies already generate enormous revenues and have solid businesses. Companies like Microsoft and Google dominate much of sincere technological development.
Still, not everyone is convinced the enthusiasm is sustainable. If AI-related companies fail to meet huge profit expectations, stocks could fall sharply.
Why is Wall Road rising despite the war with Iran and inflation?
In addition, investors also remain very attentive to the international situation. Although the war with Iran remains a major concern, many markets are betting that there will eventually be some kind of agreement that reduces tensions.
The reason is clear-slash: if the conflict decreases, oil could fall in price and that would help alleviate inflation. Currently, any problem in the Strait of Hormuz affects global oil transportation and puts pressure on energy prices.
“It is clear that if the United States and Iran manage to reach a preliminary agreement in the coming days, the price of oil will fall further, bond yields will decrease and stocks will rise,” said Tom Holland of Gavekal Be taught.
However, Holland also issued an important warning: “The view that an agreement is imminent could be dangerously optimistic”.
And that is precisely the point that many small investors must understand: Although Wall Road remains enthusiastic, risks remain present. Inflation is not completely gone yet, and the Federal Reserve could keep interest rates elevated for longer.
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