U.S. stocks may collapse at any time if their foundation is unstable?

Since the beginning of October, the US Standard & Poor's 500 Index and the Nasdaq 100 Index have risen by 10% and 15%, respectively, mainly due to better-than-expected third-quarter earnings reports. However, earnings expectations for the next two years have hardly risen, and stronger-than-expected earnings reports have not improved the prospects for 2022 or 2023. The entire rebound is driven by rising price-earnings ratios.

The entire rebound since the beginning of October is not due to improved fundamentals, but more from the risk-taking behavior of investors, which is a bad sign.

Growth slows down, price-to-earnings ratio rises

At present, the price-earnings ratio of the Nasdaq 100 index is 29 times, much higher than the 24 times in mid-May. As the price-earnings ratio continues to expand, analysts’ consensus on the Nasdaq 100 index has fallen to $551.22 per share, a drop of nearly 2% from the September high of $562.16. In addition, the growth rate of the Nasdaq 100 index is expected to drop to 8.8% next year. This data has been declining significantly since 13.1% in mid-July.

The situation of the S&P 500 index is not much better. The price-earnings ratio of the index has risen from 20 times on October 4 to 21.4 times, which is the highest level since the beginning of the new crown pandemic. At the same time, since September 30, the expected earnings for 2022 have only risen by less than 1% to $217.11 per share. The growth rate of the S&P 500 index is expected to be slightly less than 8%.

The stock market's rise is the opposite of people's expectations. A slowdown in economic growth and flat or declining earnings expectations should lead to a decline in price-to-earnings ratios and a decline in the value of these stock indexes.

Benefits may not last

If the price-to-earnings ratio of the Nasdaq 100 index recovers to 26 times on October 4, based on the current profit forecast for 2022, the index's valuation will be at 14,331 points. This is 1% lower than the closing point of 14,472 points on October 4, and nearly 10.3% lower than the closing point of 15,985 points on November 10.

This makes the current stock market rally very suspicious and very fragile. Considering that next year's earnings growth rate is declining, some people believe that the price-to-earnings ratio of the Nasdaq 100 should be lower than on October 4.

If this wave of rally starts to stagnate, don't be surprised, because it has no basis for the rise from the beginning.