Written by Jamie McGeever
ORLANDO, Florida (Reuters) – FOMO and TINA are two buzzwords that have become commonplace in the financial markets. Together, they help explain the relentless rise in US equities – a trend that may now be raising red flags.
Investors' “fear of missing out” (FOMO) on a two-year run has helped hit 47 record highs this year. And this momentum shows few signs of abating because if investors want equity exposure, “there is no other way” (TINA) to the United States, at least not if the relative strength of US economic data and corporate profits is your guide.
In many ways, the latter trend feeds the former, and the symbiotic relationship between the two seems to be growing stronger.
EVERYTHING IS SUMMER
The S&P 500 and Nasdaq are both up more than 20% this year, compared with 16% for , 14% for Chinese green chips and earlier Asian stocks for Japan, 10% for stocks of the euro zone, and 8% of 100.
Wall Street's outperformance has, of course, been tempered by a few Big Tech names: the FAANG index is up a whopping 34% this year. But year-to-date gains for the equity-weighted S&P 500 of 15% are still better than anywhere else investors are getting.
While these reduced returns may suggest that US equities are “overbought”, fundamentals suggest otherwise. The Atlanta Fed's GDPNow model currently projects third-quarter annualized growth at 3.4%, the highest since the model began calibrating in July.
Corporate America also has a very positive outlook. While earnings growth is expected to be around 5% in the third quarter, this figure is expected to double in the coming quarters and remain around 15% in 2025 overall, according to LSEG I/B/E/S. measurements.
No wonder equity strategists at Goldman Sachs think the S&P 500 will hit 6000 points by the end of the year. It could even go as high as 6270 if markets see a repeat of the historic October-December election patterns, they added.
Meanwhile, Germany – Europe's largest economy and the world's fourth largest – is flirting with its second consecutive annual contraction, something the advanced manufacturing hub has not seen in more than 20 years.
China – the world's second largest economy – is in the midst of a major asset crisis and is flirting with inflation. This has prompted an unprecedented policy response from Beijing that many experts no longer think will be enough to get the economy firing on all cylinders.
Then there's Japan, which seems so concerned about stalling its economy and angering investors that it's reluctant to raise interest rates by a few basis points.
Foreign investors have clearly noticed: their share of the entire US equity market is now a record 18%, Goldman Sachs figures show.
FULL AND EXPENSIVE
Is the US stock market turning into a mirror image of the US bond market? Similarities emerge: both are highly liquid markets in their respective asset classes; they offer investors 'very safe' securities; and dwarfed all rivals by a long distance.
Indeed, Wall Street has been a veritable money machine for investors this year, especially the mega-caps that are sitting on piles of cash and boasting credit ratings comparable to those of the federal government.
So it's no surprise that the US share of the global equity market has risen to a record high of 72%. Who wouldn't want a piece of that pie?
This level of concentration cannot last forever, so investors should be careful to buy US stocks at current levels, right?
Maybe, but maybe not.
Of course, US stocks are the most expensive in the developed world by some distance, based on long-term averages measured by Robert Shiller's price-to-earnings (CAPE), and they are more expensive than they have been compared to global stocks. for more than twenty years.
But, worryingly for US bears, investors are unlikely to redistribute any time soon. “Institutional investors are forced into the market right now given the 'FOMU': fear of equity indices,” Goldman's Scott Rubner wrote this week, giving investors another summary.
And bull markets that celebrate their second birthdays historically tend to last for years afterward, found Ryan Detrick at the Carson Group.
So US bears may be right that equity markets will eventually make a comeback, but these investors are risking underperformance and losing customers long before that happens.
(The views expressed here are those of the author, a Reuters reporter.)
(By Jamie McGeever Editing by Christina Fincher)
