Two surveys gauging investor sentiment have been released inside the last seven days, and each revealed a bullish outlook for the stock market. After all, it is sensible that the bulls can be out in force after an 18-month stretch that saw all of the main market indexes reach all-time highs.
Last yr, the S&P 500 gained 24%, and this yr it has already returned 15%, and we’re not quite halfway through yet.
Nevertheless, it’s price considering whether all that optimism is just irrational exuberance based on past performance quite than the realities of the current. Let’s take a better look.
Bullish sentiment jumps in June
Considered one of the surveys got here from the American Association of Individual Investors (AAII). The AAII reported that bullish sentiment, or expectations that stock prices will rise in the subsequent six months, jumped 5.6 percentage points since early June, reaching 44.6%.
Bullish sentiment as tracked by AAII is well above the historical average of 37.5%.
Meanwhile, bearish sentiment, or the assumption that stock prices will fall over the subsequent six months, fell 6.3 percentage points to 25.7%. Bearish sentiment is well below its historical average of 31%.
Neutral sentiment stayed roughly the identical, up 0.7% to 29.7% but below the 31.5% historical average.
The spread between bullish and bearish sentiment rose 11.9 percentage points to 18.9%, which is significantly higher than the historical average of 6.5%.
In keeping with the survey published on June 13, 39.8% of investors said their six-month outlook was most affected by the economy and inflation. That’s interesting provided that inflation remains to be high and economic growth has slowed.
The second-biggest factor for investor outlooks was monetary policy/ rates of interest at 20.8%. This can also be surprising for the reason that Fed recently indicated there would only be one rate cut this yr. It also supports the argument that the markets consider the Fed is being too conservative in its estimates.
The third reason cited by investors can also be interesting. Although corporate earnings results have carried the markets this yr, just 17.8% of investors cited earnings as an element for his or her sentiment.
The fourth reason could possibly be essentially the most telling of all, as just 15.5% said valuations were the fundamental consider their outlook. This was likely the fundamental response from those that are bearish.
Fund managers are also bullish
One other recent survey also focused on investor sentiment, however it gauged skilled fund managers quite than individual investors. Nevertheless, the outcomes were largely the identical.
Bank of America Securities’ Global Fund Manager Survey showed that investors are essentially the most bullish they’ve been since November 2021.
“Our broadest measure of FMS sentiment, based on money levels, equity allocation, and economic growth expectations, inched higher to six.03 from 5.99 last month,” Bank of America Strategist Michael Hartnett said, in accordance with CNBC.
That ought to raise a red flag for some people, as November 2021 was right across the time the market crashed after the previous tech bubble burst.
The survey also shows that fund managers are much less concerned about inflation than they were before, as 32% cited it as the highest market risk, in comparison with 41% in May. Twenty-two percent of managers indicated that geopolitics was the highest risk, up from 18% in May, followed by the presidential election at 16%, up from 9%.
Just like the AAII study, there may be a way that the Fed is being too conservative regarding rates, as 80% of fund managers expect two or more rate cuts in the approaching yr, starting in September.
Fund managers also see little probability of a recession, with just 5% expecting a recession — the bottom total in recent months. Further, 64% now anticipate a soft landing.
Is the market overvalued?
After reviewing each surveys, some investors could also be wondering whether or not they reveal wishful considering, irrational exuberance or clear-eyed optimism.
On the one hand, corporate earnings have been strong and may improve once the Federal Reserve starts lowering rates of interest. The truth is, it looks just like the Fed will start cutting rates soon, possibly even in September, as economic indicators like inflation rates appear to be headed in the fitting direction.
The massive concern is valuations. The last time sentiment was this high in November 2021, the markets crashed soon thereafter as valuations had grow to be unsustainable.
Currently, the P/E ratio of the S&P 500 is around 24, which is barely above recent historical averages but significantly below where it was when it hit a recent high of 39 in November 2020. The forward P/E drops right down to 22.
Nevertheless, the 10-year inflation-adjusted Shiller P/E ratio, which is a broader snapshot, is at almost 36 — up from around 29 in September. When the market crashed in the autumn of 2021, the Shiller P/E was at 38, so that is as high because it has been for the reason that end of 2021.
The Nasdaq 100’s P/E ratio is currently 31.7, which is roughly where it was a yr ago. Nevertheless, it’s well below where it was at the tip of 2021, when the P/E stood at 38. The Nasdaq 100’s forward P/E drops to twenty-eight.
What’s the takeaway?
The important thing takeaway from these surveys is that we will not be quite where we were when things burst in 2021, although there are some warnings signs.
Nevertheless, that is a special market than that was because the rally is broader than the technology sector. Yet, the present market is driven by mega-cap stocks, which have the earnings and money flow to back it up. In 2020-21, we saw more stocks that were soaring although their underlying firms had no earnings.
I can’t predict what’s going to occur; I can only present the information. Nevertheless, it might be a great idea to ascertain the P/E ratios of the person stocks you might be investing in to be certain that they aren’t spiking too high, particularly those of firms without the earnings to back it up.