US equity valuations are currently not symptomatic of a stock market bubble. However, with frenetically rising stock prices in the face of simultaneously deteriorating macro and micro fundamentals, two questions are begged: First, what is driving the rise in stock prices represented in broad indices such as the S&P 500, Dow Jones Industrial Average and Nasdaq? It is clearly not the recent evolution of fundamentals in the form of macroeconomic and corporate earnings forecasts. Second, how sustainable is the current rally and how far can it go?
With this week’s developments and the stock over $200, “in one sense I can say this is behind us,” Mr. Hastings said. “But it’s like a partially healed bone. It’s still quite fragile. Were we to make a similar mistake, we’d be right back in the penalty box. So we’re not really out of the woods. We’re growing and we’re making good progress, but we’re still not fully back to where we were.”
This is a pretty wide margin, and it made us think of this recent NFIB survey that showed that taxes and government red tape are the biggest problems facing small businesses today. Large caps are obviously more equipped to handle government requirements and red tape. Is this large-cap outperformance the new norm in the current economic environment?