Valuation Suddenly Matters, But Will Rotational Action Provide Safety?
While high P/E growth stocks were hit hard, selling was concentrated and uneven.
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Although Walmart WMT is not considered a "growth stock," the retail giant's poor earnings report triggered aggressive selling in high-P/E growth names. The extent of the damage to this group of stocks is best seen in the Innovator IBD 50 ETF FFTY. This lightly traded ETF reflects stocks with high P/Es and strong momentum. The ETF fell 7.4% on Friday and was down over 12% for the past week.
The better-known Magnificent Seven ETF MAGS was down only 2.5% on Friday, but it has been in a shallow downtrend since mid-December and has not been as elevated. Small-caps took a 2.9% hit, but the breadth didn’t quite reach 3 to 1 negative, as there was some rotational action in lower P/E value names.
The primary issue now is whether this is the start of a broader market correction or just a health shakeup, with market players being more cognizant of valuations. Valuation has been a concern for a while, but there are areas of the market that are not nearly as extended as the high P/E growth names.
In addition to the valuation issue, market participants face a host of other issues. Concerns about economic slowing, weaker consumer sentiment, and sticky inflation are among them. There is still great uncertainty about tariffs, and the aggressiveness of the Trump administration is unsettling and creating higher levels of uncertainty.
The market will be reacting to consumer confidence on Tuesday, home sales data on Wednesday, and durable goods on Thursday, but the PCE inflation report on Friday is most likely to move the market.
In addition, earnings from Nvidia NVDA, Home Depot HD, and Salesforce CRM are due this week. The reaction to those reports will tell us whether a reassessment of P/E ratios is taking place.
There is some rebound action on Monday morning, but the issue is whether the strength will be used by trapped bulls to escape some positions that were slammed on Friday. While it is likely that trust levels will be very high, dip buyers may be interested in building positions if there is a failed bounce and a lower low.
It continues to be a very tricky and highly volatile market, but there are signs of rotational action that may offer some safety.
At the time of publication, Rev Shark had no positions in any securities mentioned.
