The Nasdaq has fallen more than 3% over five days, yet investingLive argues the U.S. bull rally still rests on strong corporate earnings. The S&P 500's forward P/E sits at 20.1, only slightly above its five-year average, while 86% of index members have posted positive EPS surprises so far. Middle East tensions and falling semiconductor stocks are the two pressure points.
Over the past five days the Nasdaq has fallen more than 3%, and while the case for a further decline may look strong at first glance, investingLive counts several "buts" against it. Strong corporate earnings, in its reading, still support the rally.
Middle East tensions push oil higher
Tensions in the Middle East have flared up again, pushing oil prices higher and raising concerns about a more aggressive Federal Reserve stance. But the White House has little interest in letting the conflict drag on, as it could hurt the Republicans' chances in the upcoming midterm elections.
According to a POLITICO poll, the share of MAGA supporters who believe the war is worth the economic costs has fallen from 50% in May to just over one-third. Nearly one in five believe the U.S. should end its involvement in the war regardless of the cost.
S&P 500 forward P/E sits at 20.1
FactSet data puts the S&P 500's forward 12-month P/E ratio at 20.1, slightly above its 5-year average of 19.9 and 10-year average of 19.0, but still below the 20.4 level reached at the end of Q2. Meanwhile corporate earnings are still growing, especially among large technology companies, with 86% of S&P 500 companies reporting positive EPS surprises and 80% reporting positive revenue surprises so far.
So the market looks expensive but may not be a classic bubble, because current stock valuations are still supported by strong corporate profitability.
Semiconductor stocks fall as AI chip demand stays high
Concerns are growing that the hundreds of billions of dollars companies like Nvidia are pouring into data centres may not pay off as expected. Reports of a state-backed Chinese company mass-producing DUV lithography equipment are adding pressure to the sector.
Profit-taking after a strong rally is adding to that pressure. Still, the fundamentals remain strong, with demand for AI chips staying high and earnings continuing to grow.
Strait of Hormuz could reopen soon
The Strait of Hormuz could reopen soon, while Big Tech — including Microsoft, Meta, Apple, and Amazon — could surprise this week with stronger-than-expected AI investment returns.
Even if the risks do play out and things turn worse than expected, investingLive closes on a reminder: markets can stay irrational longer than a trader can stay solvent.
Source: investingLive
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