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Just like in life, excess exuberance has its downside when putting money to work in markets.
Chiefly, you forget to always be looking around corners for risks, even if stocks are going up every single day — as they have been much of the summer. Then, as a complacent investor on the beach, you miss the signs that say "Danger: Sharks." Or rather, "Danger: Correction."
And make no mistake, there are a lot of complacent investors.
"Expectations are on the more optimistic side. So any small thing could rattle investors," JPMorgan Private Bank senior markets economist Stephanie Roth told me on Yahoo Finance Live. "There [is] a long list of things that are potentially surprising to markets. Everybody is generally complacent. So it could be any negative news that would scare investors."
The market is already pouring some cold water on complacent investors, but I wonder if it needs to happen more broadly if stocks want to mount a rally into 2024.
Apple's stock got hit by 3% on Friday simply because of a minor sales miss in iPhones. IPad sales weren't great, sure. And yes, September guidance was meh, at best.
But this wasn't a disaster quarter for Apple! In fact, the company's most profitable line of business — services — saw sales grow 8% from the prior year. In the prior quarter, services sales rose 5.5%.
The company is sitting on billions upon billions in cash, and they are using it to aggressively buy back stock. The Vision Pro release later this year is a clear tailwind for Apple's valuation multiples.
Yet the stock gets hit. Why? Investors were probably expecting too much from Apple's numbers given the stock is up about 50% on the year.
Again, investors got complacent.
We saw the same outcome over at Netflix following its earnings. Great quarter. Great outlook. The stock gets hammered the next day.
Why? Complacency and over-exuberance.
The raw data from earnings season underscores this new market dilemma.
The average stock price has declined 0.7% after earnings among the S&P 500 companies that have announced, according to Evercore ISI pro strategist Julian Emanuel. Companies beating on both the top and bottom lines are only higher by 0.5% on average vs. a 1.0% average gain over the past five years.
Companies missing on the top and bottom lines are seeing their stock price knocked down by 2.6% on average.
"We see a market more vulnerable to bad news as stocks have become extended on a short-term basis," opines the always astute strategist Keith Lerner at Truist. "We already have seen some of this vulnerability in the first few days of August on Fitch’s surprise downgrade of US debt. Also, the move in the 10-year US Treasury yield above the 4% level will likely act as a headwind to further expansion in already lofty equity valuations."
Keith is spot on. And maybe your complacent self isn't.
Sorry but not sorry for pointing this all out.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].
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