US Stock Market, Strong Earnings but 19x Adjustment Warning?...Experts "The Real Problem is Emotional Selling"

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Although anxiety in the U.S. stock market is growing, Wall Street experts diagnose that investor fear, rather than corporate earnings and fundamental economic strength, is shaking the market more significantly.

Julian Koski, Chief Investment Officer of investment firm New Age Alpha, and Adam Johnson, portfolio manager of Bullseye American Ingenuity Fund, assessed in an interview with Kenny Polcari, host of Yahoo Finance's Program Trader Talk, on September 16 (local time) that there is a significant gap between recent market instability and corporate fundamentals. Koski emphasized that companies met growth expectations reflected in their stock prices during the recent earnings season. He stated, "Fundamentals are very strong," arguing that the market is over-reflecting fear rather than actual performance.

There was also an assessment that the market's initial judgment surrounding the AI shock was excessive. Johnson mentioned Salesforce, ServiceNow, and Oracle, explaining that software companies are transforming from victims of AI into major beneficiaries. He pointed out that some companies' price-to-earnings ratios have fallen to 12-13 times, but their growth rates remain at 20-25%. This suggests that the market has overly discounted software stocks, driven by anxiety surrounding AI.

The bond market was cited as the biggest variable for the stock market. The participants assessed that as the U.S. 10-year Treasury yield rose to around 5%, market interest rates were already playing a significant role even without additional tightening by the Federal Reserve (Fed). Johnson stated that with the emergence of Treasury bonds offering a 5% yield, "cash has become an investable asset again." The view was also presented that while some funds might shift from stocks to Treasury bonds, companies can adjust their growth strategies to higher capital costs.

The analysis suggests that rising interest rates are more likely to lower the price-to-earnings ratio applied to the stock market than corporate earnings themselves. The participants estimated that the S&P 500's P/E ratio could fall from 22-23 times to 20-21 times, and possibly even to 19 times depending on the situation. However, they interpreted this as a normal price adjustment rather than an economic collapse. They explained that the trends in the Leading Economic Index (LEI), Volatility Index (VIX), and S&P 500 are also not showing signs of a severe recession.

Both experts emphasized the importance of avoiding emotional trading rather than trying to predict market direction. Koski stated, "We focus on avoiding losers rather than picking winners," and manages risk based on verifiable data such as stock prices and financial statements. Johnson explained that he looks for companies whose cash flow is expected to double or triple over several years, invests 2-4% of his total capital, and holds as long as the investment thesis remains valid. Koski argued that despite approximately 40 stock market declines since 2008, maintaining investments was more advantageous than repeatedly exiting the market.

[Article Key Summary]

-Wall Street experts assessed that despite recent stock market instability, corporate earnings and the fundamental strength of the U.S. economy remain robust.

-The 5% U.S. 10-year Treasury yield was identified as a variable that could trigger a partial shift of funds from stocks and a decline in the S&P 500's price-to-earnings ratio.

-It was argued that strategies focusing on verifying a company's growth potential and financial statements are more crucial than emotional trading driven by investor fear.

*Disclaimer: This article is for investment reference only and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*