Yahoo Finance Why the Trump stock market has lost touch with any form of reality
Overly bullish investors — jazzed up about “progress” on the U.S.-China trade war at the G20 — are long overdue for a beatdown at the hands of the spike filled reality stick.
“The market has lost touch with the fundamentals,” Diamond Hill Capital Management portfolio manager John McClain said on Yahoo Finance’s The First Trade.
McClain may be right on the mark here.
Consider this nugget of fresh info from Jan Hatzius and his strategy team at Goldman Sachs. The S&P 500 has risen 7% from its trough on June 3, with valuation expansion accounting for more than 95% of the rally. In effect, stocks have been boosted by thinly veiled promises from the Federal Reserve of lower interest rates this summer. That is instead of stocks being powered by the healthier combination of valuation expansion and rising earnings estimates on Wall Street, in large part because Corporate America is in fine health.
As a result of the lingering trade war, an argument could be made that Corporate America has caught a flu and doesn’t deserve its loftier valuations. FactSet says out of the 113 S&P 500 companies that have issued second quarter guidance, 87 have served up earnings warnings. The number of companies issuing negative earnings guidance for the second quarter is above the five-year average of 74.
The data from FactSet makes perfect sense when taking a glimpse at souring reports on U.S. manufacturing since May. Said data is unlikely to reverse course this month even if the Fed slashes interest rates as widely expected.
Investors stand to be ‘clobbered’
Messy quarters and outlooks from trade bellwethers FedEx (FDX) and Micron (MU) also play into the rationale investors have lost touch with reality. It’s hard to imagine that based on those early second quarter earnings results, the coming earnings season doesn’t represent a material risk to stock prices.
These headlines don’t deserve to be rewarded by investors — quite the contrary.
For his part, McClain believes investors stand to be “clobbered” as the true health of Corporate America is digested via earnings reports due to hit the wires shortly. Meanwhile, Hatzius doesn’t doesn’t think much was accomplished at the G20 to warrant such exuberance on Wall Street.
“No substantive progress was announced on the main issues in the dispute. Potential partial easing of US restrictions on exports to Huawei represents slightly more de-escalation than expected, though the details remain unclear,” Hatzius wrote in a note to clients.
Nevertheless, the S&P 500 briefly surpassed its previous all-time intraday high earlier Monday, reaching as high as 2,977.93 on the session before retreating.
Yet another sign of investors forgetting reality.
Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi
Read the latest financial and business news from Yahoo Finance
Trump's trade war with China may shock investors this summer
2 black swans could come out of nowhere and kill stocks this summer
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
