Posted in: Market News
Published:
January 10, 2020 9:30 PM UTC

Everyone’s Bullish on Stocks – Except the People Who Matter Most

Most traders believe stocks are destined to go higher in 2020, but corporate leaders fear equities are overvalued.

  • Stocks are hovering near record highs again after President Trump diffused the possibility of all-out war with Iran.
  • Corporate America isn’t nearly as bullish on stocks or the economy, according to a recent survey by Deloitte.
  • The 2020 presidential election could magnify downside risks if the U.S. economy continues to sputter under Trump.

The Dow and broader U.S. stock market returned to record highs this week after President Trump seemed to diffuse heightened tensions with Iran following the targeted killing of General Qasem Soleimani.

Beyond the trading algorithms and mainstream talking heads, the boardrooms inside Corporate America aren’t nearly as bullish on stocks or the economy as the current rally would have us believe. In the eyes of C-level executives, equity markets in America and beyond are extremely overvalued.

CFOs Say Stocks are Overvalued: Deloitte

Executives at big U.S. companies entered the year on a cautious note, as overvaluation risks and a weakening global economy clouded their outlook, according to Deloitte’s CFO Signals Survey.

Although the general tone of the survey was positive, business leaders expect consumer and business spending to slow towards the end of 2020. More than four-fifths (82%) of chief financial officers surveyed said they expect to take more defensive actions as the year progresses. Such measures include reducing discretionary spending and human resources.

More than three-quarters (77%) of survey respondents said stocks are overvalued. As CNBC reports, that’s the highest level in almost two years. The percentage of executives who said stocks are undervalued declined six percentage points to just 4%.

Among the issues keeping corporate leaders up at night are U.S.-China trade uncertainty and politics. Washington’s preliminary trade deal with China, which is expected to be signed next week, will provide only temporary reprieve as more contentious issues like technology transfers and intellectual property remain unresolved.

Global Risks are Paramount

The U.S. economy has been on a downward slope since President Trump’s tax reforms went into effect back in 2018, but with recession not in the cards, corporate leaders are more concerned about what’s happening overseas.

Sixty-nine percent of respondents in the CFO survey rate conditions in North America as “good” versus just 7% who say the same for Europe and 18% for China.

2020 is expected to be China’s slowest year of expansion in three decades. In Europe, policymakers have restored quantitative easing and deeper rate cuts to stimulate growth. With Germany narrowly avoiding back-to-back quarters of contraction, the 19-member Eurozone remains on the precipice of recession.

Germany narrowly avoids a technical recession in 2019. | Chart: tradingeconomics.com

Risks to the global economy only embolden fears that stock markets are overvalued. Case in point: The S&P 500 Index has a price-to-earnings (P/E) ratio of 18.6, which is well above the ten-year average of 14.9, according to FactSet data.

Delving deeper into the S&P 500, the price-to-sales ratio of the large-cap index is now at record highs, according to Ned Davis Research.

Stocks Pull Back from Record Territory

The U.S. stock market capped off a stellar week trading slightly lower on Friday. The S&P 500 Index fell 0.3% to 3,265.35. Eight of 11 primary sectors reported declines, with financials leading the pack. Industrials and energy stocks also under-performed the benchmark index.

After soaring to record highs on Thursday, the S&P 500 Index ends the week on a whimper. | Chart: Yahoo Finance.

The Dow Jones Industrial Average fell 133.13 points, or 0.5%, to close at 28,823.77. The technology-laden Nasdaq Composite Index settled down 0.3% at 9,178.86.

This article was edited by Josiah Wilmoth.

Last modified: January 22, 2020 11:39 PM UTC

Sam Bourgi @hsbourgi

Financial Editor of CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com

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