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Is The Stock Market Becoming A Safe-Haven For Returns?
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The global economy has fallen into a deep, medically induced economic recession. Hundreds of millions of jobs have been lost, and the IMF expects global output to fall 5% this year, which is worse than the 2008 financial crisis. So why is the US equity market booming?
1000 & 1 Explanations for The Rally
5 months ago, the stock market bottom out and fear-seized traders, investors, & analysts never could have imagined the S&P would be hitting new all-time highs today. Now analysts are racing to come up with all the reasons why this market rally continues unwavering.
The Federal Reserve saved the US stock market: flooding the economy with liquidity and generating an indefinite easy money policy that made future earnings of publicly traded enterprises more valuable than ever (low-interest-rates = low discount rate).
The world has been forced to digitalize at a prolific rate to accommodate the home-bound environment that COVID-19 instigated. We saw 5 years of digitalization in just 5 months as the world turns to online platforms for learning, working, communicating, shopping, and entertainment.
Innovation-driven US tech stocks have surged this year because of the rapid global digitalization and the increased value of these growth companies' future earnings (because of the lower discount rate used). Secular tech stocks have been the engine that has sent equity indexes to all-time highs, but there may be more to this endless rally that people are not discussing.
More to The Story
Jerome Powell and his dovish band of central bankers have set their benchmark Fed Funds rates to a historically low rate of effectively 0%, to combat the virus's economic side effects. This has pushed yields for all fixed-income assets, whether it be T-Bill, investment-grade corporate bonds, or mortgage back securities, to their lowest rates in history.
The 10-yr Treasury yield fell below .5% (roughly 100 basis points below old low) during the flight to bonds in March. This benchmark interest rate hasn't recovered, with a current yield of .65%.
These low yields are forcing institutional investors up the risk ladder to achieve the annual returns they require, with safe blue-chip stocks being at the top of the list of investable assets.
Apple is a staple of the US stock market, and the public has been trading it as such. AAPL is viewed as about as safe as treasury note, with its fortress of a balance sheet, reliable yield that matches the treasury, and not to mention massive capital growth potential, already returning investors 145% in the past 52-weeks. I question its continued ability to provide investors this type of outsized gains in the year to come.
Over the past year, AAPL's 12-month forward P/E valuation doubled from a sensible 16x to a stretched 32x.
The initial reasoning behind the valuation surge was the business's push towards reliable subscription-based revenue streams. Yet these services only make up 18% of Apple's last 9 months of revenue. Apple's service revenue is growing in the mid-teen percentages year-over-year, which doesn't justify its seemingly prolific valuation appreciation.
Apple's highly anticipated 5G phone, which is expected to be unveiled in September, could be a big topline driver if there were no significant supply chain-related delays. Still, this leaves the business to remain reliant on cyclical hardware sales, which are too uncertain for this extensive AAPL valuation expansion to be justified.
The only other explanation is that risk-averse investors are now utilizing America's largest publicly traded company as a conduit for robust long-term returns as a substitute to the ultra-low yielding fixed-income assets.
Whether AAPL can sustain its current price/valuation level remains to be seen. Those of you invested in this $2 trillion company lookout for the 4-to-1 stock split next Monday (August 31st).
Final Thoughts
AAPL is not the only example. You can see this rotation out of fixed-income and into equity demonstrated in the valuations of many blue chip stocks over the past 3 months, specifically those in tech. Apple just appears to be the largest conduit of this reallocation behavior.
Many analysts have pushed their year-end S&P 500 targets up to 3,600, which is more than attainable. Still, I expect volatility could increase in the coming weeks, with the looming November election and re-heightened trade tensions between US & China, as Washington & Beijing look past the pandemic and towards their vital relationship in the roaring 20s to come.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
Is The Stock Market Becoming A Safe-Haven For Returns?
The global economy has fallen into a deep, medically induced economic recession. Hundreds of millions of jobs have been lost, and the IMF expects global output to fall 5% this year, which is worse than the 2008 financial crisis. So why is the US equity market booming?
1000 & 1 Explanations for The Rally
5 months ago, the stock market bottom out and fear-seized traders, investors, & analysts never could have imagined the S&P would be hitting new all-time highs today. Now analysts are racing to come up with all the reasons why this market rally continues unwavering.
The Federal Reserve saved the US stock market: flooding the economy with liquidity and generating an indefinite easy money policy that made future earnings of publicly traded enterprises more valuable than ever (low-interest-rates = low discount rate).
The world has been forced to digitalize at a prolific rate to accommodate the home-bound environment that COVID-19 instigated. We saw 5 years of digitalization in just 5 months as the world turns to online platforms for learning, working, communicating, shopping, and entertainment.
Innovation-driven US tech stocks have surged this year because of the rapid global digitalization and the increased value of these growth companies' future earnings (because of the lower discount rate used). Secular tech stocks have been the engine that has sent equity indexes to all-time highs, but there may be more to this endless rally that people are not discussing.
More to The Story
Jerome Powell and his dovish band of central bankers have set their benchmark Fed Funds rates to a historically low rate of effectively 0%, to combat the virus's economic side effects. This has pushed yields for all fixed-income assets, whether it be T-Bill, investment-grade corporate bonds, or mortgage back securities, to their lowest rates in history.
The 10-yr Treasury yield fell below .5% (roughly 100 basis points below old low) during the flight to bonds in March. This benchmark interest rate hasn't recovered, with a current yield of .65%.
These low yields are forcing institutional investors up the risk ladder to achieve the annual returns they require, with safe blue-chip stocks being at the top of the list of investable assets.
Innovation giants like Amazon (AMZN - Free Report) , AAPL (AAPL - Free Report) , and Microsoft (MSFT - Free Report) have been pushed to their highest P/S valuations in history.
Look At Apple (AAPL - Free Report)
Apple is a staple of the US stock market, and the public has been trading it as such. AAPL is viewed as about as safe as treasury note, with its fortress of a balance sheet, reliable yield that matches the treasury, and not to mention massive capital growth potential, already returning investors 145% in the past 52-weeks. I question its continued ability to provide investors this type of outsized gains in the year to come.
Over the past year, AAPL's 12-month forward P/E valuation doubled from a sensible 16x to a stretched 32x.
The initial reasoning behind the valuation surge was the business's push towards reliable subscription-based revenue streams. Yet these services only make up 18% of Apple's last 9 months of revenue. Apple's service revenue is growing in the mid-teen percentages year-over-year, which doesn't justify its seemingly prolific valuation appreciation.
Apple's highly anticipated 5G phone, which is expected to be unveiled in September, could be a big topline driver if there were no significant supply chain-related delays. Still, this leaves the business to remain reliant on cyclical hardware sales, which are too uncertain for this extensive AAPL valuation expansion to be justified.
The only other explanation is that risk-averse investors are now utilizing America's largest publicly traded company as a conduit for robust long-term returns as a substitute to the ultra-low yielding fixed-income assets.
Whether AAPL can sustain its current price/valuation level remains to be seen. Those of you invested in this $2 trillion company lookout for the 4-to-1 stock split next Monday (August 31st).
Final Thoughts
AAPL is not the only example. You can see this rotation out of fixed-income and into equity demonstrated in the valuations of many blue chip stocks over the past 3 months, specifically those in tech. Apple just appears to be the largest conduit of this reallocation behavior.
Many analysts have pushed their year-end S&P 500 targets up to 3,600, which is more than attainable. Still, I expect volatility could increase in the coming weeks, with the looming November election and re-heightened trade tensions between US & China, as Washington & Beijing look past the pandemic and towards their vital relationship in the roaring 20s to come.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>