Suspension of disbelief no more?

• The market run since March 18th, 2020 fueled by the tsunami of liquidity from the Avengers team of Fed and Congress forced most naysayers to suspend their disbelief of the relentlessly rising markets
• Last eight months of market fretting about inflation has forced the Fed to acknowledge and to tighten rate outlook — market has still climbed the inflation wall of worry to kick-off earnings season with new highs. Early 3Q earnings results indicate less of macro and more of stock picker’s market. Some of the bubbly stocks have corrected over 80% this year.
• High valuations have usually not sufficient reason for markets to correct and its hard to identify or time the catalysts that trigger a correction — bears worried about liquidity spigots to turn off will likely have to wait for another year. US 10 year yields has behaved themselves to stay under 1.7% keeping a check on the gravitational pull on valuations
• I might sound like a broken record — markets go up or down, just stick with quality compounders

A brief correction (5.9% for S&P500 and 8.5% for Nasdaq) in September has now uncorrected in October, but nonetheless, it has tested the poetic faith in crypto, romanticism of zero revenue companies, SPAC affairs, bubble stonks, and even the barren skepticism of rising inflation or potential rate hikes.

S&P 500 has gained ~$90/sh over the pandemic year in revenues and $130/sh (~68%) in operating earnings and both 2021 revenues and earnings are 7–8% above 2019 levels while earnings are expected to end up ~20% above 2019 levels. Not to mention S&P 500 companies have added slightly over a million employees since 2019. Clearly, the Fiscal and Fed stimulus has been a vaccine of sorts for S&P 500 companies that added >$5 trillion to market cap in 2020 and another $5 trillion this year, however, the earnings multiples are still at 2019 levels. My thoughts are not very different from back in Feb, “The immediate future seems to be upcoming S&P 500 Q1 earnings, albeit based on the past quarter — Sales are expected to be $30/sh (~10%) higher and operating earnings expected to be $20/sh (~100%) higher year over year and the expectations are similar for Q2. P/E for S&P 500 will revert back to low 20x should these numbers be achieved and it can run a good 20–30% before reaching its historical high multiples, or otherwise, pull back 10% on disappointments to more historical fair value levels. While the upside of investing in S&P 500 at 4000 is certainly lower than investing at pandemic lows, S&P 500 is a high quality asset class and a strong inflation hedge historically.”

We are probably going to live in a worried post-pandemic world for a while but 1b+ single dose vaccinations in India, ~600mm in Europe, and ~400mm in USA are definitely helping economies roll back to whatever the new normal is. While rates and liquidity may not stay benign in 2022, it is still not easy to make a case against growth in 2022 in absence of resurgence in the pandemic or other extraneous events. Tax hikes for both corporates and wealthy individuals will perhaps not find enough backers on the hill, a potential positive tailwind for the market.

Other than inflationary pressures, “Supply chain disruptions” has been the most uttered word on earnings calls from the likes of Apple and Amazon and even from social media companies who are indirectly impacted by their clients. Yet, the stonk reactions to these worries have varied greatly with Snapchat down 30% while Shopify up 7%. With the exception of a handful of stocks, valuations have generally continued to rerate down to normal levels. It seems more true for SPACs, both blank checks and de-SPACed stonks — At least 40 de-SPACed stonks are down 40% or more this year and majority are down double digits this year — “the biggest pockets of excesses in an otherwise explainable market” back in February can be explained now. While the broader market has returned back to highs, it seems to be a different story under the hood. There seems to be suspension of disbelief no more.