Why the explosive stock market rally is suddenly unraveling



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A red-hot stock market may be beginning to crush under the weight of its own inflated valuation.

Seemingly out of nowhere, the Dow Jones Industrial Average plunged nearly 800 points early Thursday afternoon. More alarming is that the Nasdaq Composite, which has led the rally from the lows in late February, plunged about 4%.

Some of the best performing countries in the sector in recent months were hit on Thursday: Amazon (-5%), Apple (-7%), Microsoft (-5%), Tesla (-7%), Zoom (-11 %), Square. (-7%) to name a few. In fact, the sell-off at these tech giants has served as a red flag about the short-term sustainability of the rally for the bulls, who have also seen an under-the-radar rotation towards more defensive names this week like Procter & Gamble and Coca. -Tail. .

Talk to those on the street and a sell-off makes sense now, and long ago it should.

For starters, valuations of big tech companies like Tesla have gotten completely out of hand with reasonable expectations about future earnings. Tesla got a signal on that front Wednesday, when one of its biggest shareholders, Baillie Gifford, cut its stake after a meteoric rise in shares. Meanwhile, billionaire investor Mario Gabelli hinted in an interview with Yahoo Finance editor-in-chief Andy Serwer that he may soon cut part of his position at Apple (another one of 2020’s greats).

And then there’s the raw economic data that hasn’t improved much in recent weeks as the COVID-19 pandemic progresses. Or at least it hasn’t changed enough to justify the S&P 500 trading at a high 22x forward price-to-earnings ratio.

“It could be the beginning [of a correction]”Belpointe Asset Management chief strategist David Nelson told Yahoo Finance’s The First Trade. “I don’t think the stock market, and in particular the S&P 500 and the Nasdaq, really represents what is happening in the economy.”

Exterior of the New York Stock Exchange building with classic Greek column architecture and US flags.As seen during the day, the NYSE financial organization on Wall Street is a symbol for the global and American economy as one of the most powerful financial institutions in lower Manhattan New York City, United States of America. February 2020, NY, USA (Photo by Nicolas Economou / NurPhoto via Getty Images)

To top it off, there are the seasonal forces of September, and what will be a heated presidential election, which the bulls seem to have forgotten about.

September tends to be a weak month for stocks historically. In fact, according to LPL Financial, September has been the worst-performing month for markets, on average, since 1950. The S&P 500 has dropped about 1% on average that month since 1950, data from LPL Financial shows. The only other month to see a drop on average (and a tiny one) since 1950 is August.

But this time, September being lackluster for markets could further solidify due to election-related uncertainty. Data from LPL Financial reveals that the S&P 500 has lost 0.2% on average in an election year.

“When you look at Tesla, it is trading at a market capitalization of $ 455 billion, 10 times what General Motors is trading. So we have to ask whether fundamental analysis can support some of these assessments. When we look at Zoom, it is trading at more than IBM and at a P / E ratio of more than 500 times versus IBM at 15 times. What I think is happening is that investors are starting to look at valuations a bit more, ”says Greg Branch, a consultant at 1847 Financial.

@BrianSozzi and in LinkedIn.“data-reactid =” 38 “>Brian Sozzi is a general editor and co-host of The first trade on Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and in LinkedIn.

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