The “E” behind the Stocks

The global Equity markets have become volatile in Sept 2020 

The favourites of 2020... Apple , Facebook, Amazon, Alphabet, Zoom , Microsoft , Tesla have all hit all time highs and come off quiet sharp in Sept 2020

Biotechnology and vaccine makers are the areas of businesses , Investors are actively looking to pour money

Fintech or any business which is contact less , can be E Commerce , Mortgage lenders , Securities trading company, cloud computing, etc are all whose Stock prices have multiplied 4-5 times in the last 12 months in anticipation 

But above all the message from the FED and Treasury is more money has to be committed into the US economy 

Remember the US Stock markets are one of the most important markets in the world and trend setter of other capital markets across the globe

2008 Financial crisis was all about corporates and they needed monetary stimulus to save the large corporates of America 

But 2020 is about the real economy and Covid 19 pandemic , so the money being stimulated has to find its way into the economy of the nation

Now when the FED and Treasury are strongly favouring the continuing of stimulus and which means to stoke the inflation , there is no way a seasoned Investor or Trader can bet against the Stock markets 

But in the process it’s the one key letter which is most likely ignored by all Investors and Traders ..                          i.e “E” 

which is “Earnings”

It’s the Earnings which finally has to drive the company forward and growth in Earnings has to result in profits and subsequent increase in Share prices 

The price we pay for a stock is the multiple of its future earnings , as an investor it’s impossible to envision the earnings of a company beyond 5 -7 years in realistic circumstances. 

As in fast changing world the moat of a business to be steady and grow beyond 5-7 years is difficult and so will be the revenue which will translate from the business 

The markets have a barometer in the US Interest rates to compare the risk free returns vs returns from risk assets 

So the anticipation of investors turn in  herd towards equities in search of better returns than risk free rates 

Once you are hunting for better returns in equities , it’s further narrowed down to find safe stocks of companies where earnings are bound to grow for next 5 -7 years

But in fast changing circumstances of business world , there are only few companies which are likely to report growth in revenue Year on Year for the next 5-7 years

 Investors obviously will start buying stocks of these companies and when too much money chases few such businesses, the price earnings multiples will get way too high in short period of time , to keep the price earnings (PE) at acceptable levels , earnings have to grow Quarter on Quarter or else the stock price can likely become volatile, as all these are still based on future earnings estimates 

But macro economies of the world keeps changing and so will effect the credit markets. 

In such times because of distortion in the credit markets eventually global rates will take refuge in the most risk free asset which is “US Treasuries”

Equities will find sell off in such times as credit markets are far more important and safer and portfolio will be realigned towards safe assets  during distortion in Credit markets 

Hence Stock prices will fall and future price earnings multiples will get readjusted in the stock prices , remember a good company whose revenue growth is projected to do well will bounce back , the one which will have apprehensions over its revenue growth may not recover in Stock prices 

Stock markets get errant at times because of too much concentration of money in a few sectors or few stocks , but as we just saw above , a mean reversion is imminent because of global macros and credit markets. 

The Earnings play the most important role in the life of Equity markets and all other factors will only help to move the markets either ways , but its Earnings which will be closely watched to gauge the appetite of investments 

In my next article we will see how the fate  of companies change from small cap to mid cap and large cap in the markets 

You can track my articles and thoughts in 

Twitter account @srinicaps 

No comments:

Post a Comment