The question of valuations for stocks and the market has been plaguing strategists and investors forever.
It’s the perennial question – what does the future hold for the company or market and what does that mean for earnings and by extension, the price, that a stock can trade at next quarter or next year?
In many ways, after a rally of more than five years in global stocks, it is the number one dilemma at the moment and prompted former Fed chair Alan Greenspan to to say on Bloomberg TV earlier this week that “stock market has recovered so sharply for so long you have to assume somewhere along the line we’re going to get a significant correction.”
It a question just as relevant for traders on the ASX as much as it is for US investors, with the ASX 200 this week posting a fresh post-GFC peak above 5600.
On the one hand, many investors and traders believe that Australian stocks are fully priced with “valuations looking toppy”, as one prominent Australian fund manager told Business Insider.
He suggested that part of the problem is that interest rates are so low that company fundamentals are being thrown out the door on the back of the broader market trend.
The market is “pricing for perfection across many stocks this reporting season”, which meant that prices had two choices in the coming weeks – the market corrects or earnings rise to meet expectations.
The problem looming over reporting season, he said, is that because “valuation dispersions have tightened and correlations between stocks are up” there is a risk of surprise.
Equally, our fund manager thought that after two years of around 20% returns, stocks in the ASX are getting toward the expensive side of the ledger.
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