- The Dow Jones Industrial Average (DJIA) marched higher on Wednesday.
- The promising Moderna vaccine trial sent stocks soaring ahead of a blowout Goldman Sachs earnings report.
- One analyst is adamant that stock valuations are becoming a “fairy tale disconnected from reality”
Stocks continue their steady march higher on Wednesday after a breakthrough vaccine trial from Moderna. The Dow Jones Industrial Average (DJIA) skyrocketed nearly 400 points in mid-session trading.
As Wall Street rallies, some analysts are firmly cautious. Nordea’s senior macro strategist Sebastien Galy gave us perhaps the most colorful opinion. He said the run-up in tech stocks, which has led the broad recovery, was a “fairy tale disconnected with reality.”
We have crossed the Rubicon, past the valley of common sense into the river of hope to the forest of make believe.
Dow jumps on Moderna vaccine
The Dow rose a phenomenal 373.99 points on Wednesday, triggered by hopes of a vaccine before the year end. The 1.4% bounce lifted the index above 27,000 to 27,016.58.
In the new vaccine trial, all 45 of Moderna’s test patients developed antibodies to fight the virus. Shares in the biotech firm jumped 12% after the news and buoyed the global stock markets.
With Pfizer and BioNTech also edging closer to an effective vaccine, the race is on to get the treatment to later-stage trials.
Much like yesterday’s session, the Dow looks set to outperform its peers. The S&P 500 was up 1.25% at 3,237.33, while the Nasdaq rose 1.06% to 10,599.43.
Are stock market valuations disconnected from reality?
The S&P 500 is close to turning positive for the year, driven by a phenomenal recovery in tech stocks. The Nasdaq is already up 15% year-to-date. In the midst of a global pandemic and recession, is this sustainable? Galy says no, especially the frothy growth sector.
Many growth stocks paint a picture of the future that is impossible.
Tech has now become the most crowded trade on Wall Street, according to the latest Bank of America survey. Galy anticipated a large correction by September or October as stocks come back down to reality.
The Dow Jones bull case
For every cautious bear-like Galy, there’s the optimistic bull case. Today’s argument comes from Bhaskar Laxminarayan of Bank Julius Baer. He agrees that stocks look ‘toppish’ and pricey, he concedes that investors have little option but to keep buying.
Some of them do look toppish but growth is at such a premium now that there is no option but for some of these prices to keep going up.
With interest rates at zero, and yield curve management on the horizon, investors have no other choice to drive a return.
Equities are the only game in town.
The latest Bank of America data appears to back this up. 77% of S&P 500 stocks now pay a higher dividend Treasuries. Investors simply can’t get the returns from bonds.
All eyes on Goldman Sachs earnings
Yesterday was all about Citi, JP Morgan and Wells Fargo. Citi and JP Morgan both beat analyst expectations thanks to a huge boost in trading revenue. But the banks remained cautious about the looming recession. Collectively, they put $28 billion aside to brace for more loan losses and defaults. JP Morgan boss Jamie Dimon summed up the nervous mood.
This is not a normal recession, the recessionary part of this you’re going to see down the road.
Dow Jones component Goldman Sachs boosted risk sentiment by smashing estimates in its quarterly earnings report.
The investment bank generated $2.42 billion in profit, or $6.26 per share. That shattered analyst expectations of around $3.78 per share.
Last modified: September 23, 2020 2:04 PM