Now, several strategists have warned that the pop in previously oversold markets is merely a bear market rally. Inflation remains higher than comfortable, ensuring that interest rates will also remain higher. Meanwhile, earnings growth seems mediocre, highlighted by Tesla’s big miss. The dangerous combination of higher cost of capital and constricted growth can only mean renewed downside for equities, according to these prognosticators.
As investors, we must acknowledge that anything can happen in the short term. However, in the long term, fundamentals drive markets, and an examination of fundamentals paint a modest, ho-hum picture for equities neither being overextended nor outright cheap. In evaluating the markets, we focus on three types of equity fundamentals: valuation, which measures how much optimism is already priced into markets, earnings, which measures whether companies are delivering growth to investors, and sentiment, which measures whether there is extreme positioning in markets that could suddenly reverse.