There’s a fierce debate on the next direction of stock markets and the difference of opinions had rarely been so far apart. Some believe that stocks are overvalued and a slump is imminent, while others, on the contrary, come with reasons why there’s a lot more upside to go. Each side views things from a certain angle and given that anything can happen, we would like to analyze each belief, so when the opportunity comes, you will be able to anticipate the direction successfully.
Are stocks overvalued?
If we take into account PER, CAPE ratio, EV/EBITDA, stock market capitalization/GDP, and other similar metrics, stocks can be considered as overvalued. At the same, the market recovery in the US had been led by a few big names, known as FAANG, which now account for more than 20% of the S&P500. Situations like this happened in the past, with the dot.com bubble as the most recent example.
However, what CFD traders know is that markets can remain irrational more than they can remain solvent and although this might be a stock market bubble, we must also look at what led to it happening in the first place. That’s right, we’re talking about massive central banks intervention and fiscal spending, which had propped up markets to where we see today.
Stocks continuing on the upside
The reality is that for the foreseeable future, central banks will continue to print money aggressively, while governments will make massive fiscal deficits. This in return will continue to prop up asset prices, since inflation is expected to rise. As long as there won’t be a shift in how public institutions intervene in the economy, stocks could continue to go up.
We’ve already seen some companies release Q2 earnings and so far, the numbers had been encouraging for financials and healthcare stocks. How will things progress with other sectors is still under a question mark, but the bottom line is that limited selling had been seen so far.
Which side will be right ultimately? We believe both have well-rooted reasons to believe the stock markets will behave in a certain way. The key will be timing and managing properly overshooting markets. A dramatic shift to the downside had not yet occurred and until it will, the best thing to do is play on the upside. We should not, however, rule out a corrective move and as long as it won’t be impulsive, more buyers will flood the market.