This season’s earnings beats have risen to record-high levels where nearly 90% of the S&P 500 firms have exceeded estimates. Yet the question remains whether risk markets have already priced in this extended level of positive earnings — and whether we can expect this trend to continue.
Total margin debt outstanding can be a useful gauge of market sentiment as bullish investors will typically take on additional portfolio leverage. Historically, large upside swings in margin debt have preceded market corrections, but unprecedented stimulus spending complicates the current picture.
Despite fears of stretched equity valuations and an overextended market rally, fewer investors have been willing to bet against the S&P 500 Index as the short interest ratio continues to dwindle.
International equities are on track to finally recover from a 2008 drawdown, while U.S. markets continue to notch record highs. This may introduce a value opportunity alongside the portfolio benefit of non-domestic diversification.
Elevated CAPE (cyclically adjusted price-to-earnings) ratios indicating higher equity prices relative to earnings have persisted over the better part of last two decades, which raises the question of how much further can markets become overvalued.
Mixing large-cap stocks and corporate bonds together to create a “diversified portfolio” is a staple of traditional asset allocation models. However, the relationship between the two asset classes continues to shift unpredictably, constantly changing the level of risk exposure.
U.S. corporate buybacks have returned to their pre-pandemic levels as economic outlook continues to climb, decreasing the need for companies to hoard emergency cash reserves.
The Bloomberg Barclays U.S. Long Term Treasury Total Return Index is currently experiencing its largest drawdown to date, plummeting more than 20% as Long Term Treasuries continue to sell off amidst skyrocketing inflation expectations, lifting the U.S. 10 Year Treasury Yield to 1.74%.
Frothy equity valuations, in addition to the recent surge in treasury yields from historical lows, have resulted in the U.S. 10-Year Treasury Yield crossing above S&P 500 Dividend Yield, similar to the market environment back in 2016.
The rotation out of growth stocks and into value stocks continues to gain momentum in 2021, perpetuated higher due to concerns over rising inflation and frothy valuations in growth stocks.