POINT OF VIEW: As long as trading on stock exchanges took place in such a way that investors had to be physically present on the floor of individual stock exchanges, it was possible to monitor the mood of investors in a live broadcast. Today it’s different. The vast majority of small and large investors trade online through individual trading platforms. So we have to examine their nervousness in a different way. Fortunately, there is a VIX index that can gauge investor fear from afar.
The VIX index measures market volatility. And watch out – the VIX index has risen by more than 40% since the beginning of this year. This shows that investors are very leery and unsure of the current valuation of the stock markets. Meanwhile, the American stock index S&P 500 has already fallen by more than 5% from its all-time highs from the end of March. Currently, the index is trading back below the psychological level of 5,000 points.
Investors’ nervousness could perhaps be attributed to tensions in the Middle East. The latest spat between Israel and Iran did cause short-term volatility, but it quickly subsided. So far, however, it seems that none of the named countries wants to expand the conflict. So the origin of the nervousness lies elsewhere. And that in the American market.
Investors are having trouble getting out of bed when interest rates in the United States continue to remain at their highest level in more than 20 years, above 5%. This means expensive loans. And their repayments hurt. At the same time, while celebrating the arrival of 2024, the vast majority of investors believed that the first downward shift in rates would come overseas already in the first months of the new year. The bet was that by the end of the year the rates in the US would already be below 4%. But rising inflationary pressures in the US pushed these estimates back indefinitely. There is concern that instead of falling to the desired 2% level, inflation in the US will not settle at 4%. Several representatives of the US central bank also admit that interest rates in the US may not go down at all this year. And, for example, central banker John Williams from the Fed even threatened that it is theoretically possible to increase rates if it is necessary to achieve the two percent inflation target.
Amid this tense situation in the US, the earnings season is underway with the numbers for the first quarter. Already last week, it took place in the spirit of the drop in the share prices of Nvidia, which is the most famous manufacturer of graphics cards. Specifically, with this title, the bubble that was inflated in connection with the boom around artificial intelligence is bursting. And what do investors expect from the current earnings season? S&P 500 companies are expected to see 2% earnings growth. That seems like an achievable goal that shouldn’t cause nervousness. But be careful. The seven largest companies in the index are expected to grow profits by almost 40%. Investors will not forgive technology giants like Microsoft, Apple, Meta or Alphabet anything at all.
The scenarios for the following days are obvious. With good results from the tech giants, stock markets will correct recent losses and rise. But I don’t want to see it if the tech giants’ numbers disappoint. Then stock markets can go down another 5%. Once again, we come across the fact that the high concentration of the S&P 500 index in its seven largest titles is a huge risk.
This is a risk not only for the titles in question, but also for the entire US stock market and potentially for the economy as well. Not only large banks, but also smaller companies and households invest in American shares – and certainly not only from the USA. And the banks already have huge unrealized losses, not just from stocks, but from bonds and corporate real estate mortgages.
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