While the stock’s Price to Sales (PS) and Price to Book Value ratios indicate a fair bit of relative stability, the Price to Earnings (PE) ratio – by far the most popular metric for stability evaluation – shows a precipitous decline of nearly 37% in the current week. While high ratios are typically seen in companies with significant invested capital or in those with high growth outlook, lower ratios signify weakening growth outlook or a recognition of the company attaining some semblance of a “steady state” in terms of market share.
BlackRock Investment Institute’s Weekly Commentary dated June 13 attributed the larger organization’s decision to not “buy the dip” in the near term to three reasons:
The energy crunch will hit growth and higher labour costs in the face of inflationary pressures will eat into companies’ profits;
Stock valuations don’t show improvement after accounting for lower earnings outlook and faster expected pace of rate rises;
There’s a growing risk that the Federal Reserve will tighten too much, making equities less attractive.
Leaving aside the third point, there’s an interplay between the first two points: if inflation weighs heavy on the earnings of individuals and corporations alike, what are the likelihoods of an upgrade in rig? Corporations could push back upgrades to improve their earnings while individuals would rather focus on essentials over spending on new tech.
There is also a very different argument as to whether the PE Ratios for long-standing companies should be in the 50s to 70s while simultaneously considering them to be stable in the first place. A dramatic growth outlook forever simply doesn’t happen.
Given that “tech” stocks have been a hot choice for investors for quite some years now, this leads to a consideration of traded volumes. Over the year till date (YTD), traded volumes have generally been trending down after the customary “January bump”. However, when comparing trading volumes in the stock versus the “tech-heavy” Nasdaq-100 (here represented by the ETF QQQ), this overall market trend isn’t very smooth.
