Daily Brief: Goldman Has Spotted Some Stock Bubbles, So Be Careful Not To Make The Wrong Move

Daily Brief: Goldman Has Spotted Some Stock Bubbles, So Be Careful Not To Make The Wrong Move

about 3 years ago3 mins

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Goldman Sachs said over the weekend that certain US stocks are in bubble territory, and one wrong move now could set off some serious alarms.

What does this mean?

There are three groups of stocks that Goldman thinks have attracted unsustainably high interest from investors. First, there’s special purpose acquisition vehicles, or SPACs: that is, listed companies that merge with unlisted companies to help them join the stock market. SPACs have raised more money so far this year than they did in the whole of 2019. Then there’s stocks of loss-making companies, which have outperformed the US stock market by 40% on average over the last twelve months.

SPAC IPOs by year

Still, Goldman isn’t too worried about those bubbles: neither group of stocks is big enough to do any widespread damage if investor enthusiasm suddenly dries up. But there is one group the bank's nervous about: high-growth and expensive stocks. They account for almost 10% of the entire US stock market value, and they’re involved in almost a quarter of all US stock trades. So if that bubble bursts, you can bet it’ll leave investors’ ears ringing…

Why should I care?

For you personally: It’s lose-lose.

Even if you believe these bubbles are some way off bursting, history suggests it’s not actually in your interests to buy in. After all, the median company whose value exceeds 20x its revenue has seen its share price drop 1% in the twelve months afterward. Compare that to the median US stock without such a high valuation: that’s risen 6% over the same time period.

The bigger picture: A matter of perspective.

US stocks are, by most metrics, looking expensive right now. But Goldman has pointed out that relative to ultra-low interest rates, they’re actually pretty cheap. The bank even reckons American companies’ strong earnings growth will drive the stock market higher still – 12% higher, to be precise.

Keep reading for our next story...

Philips Reported A Jump In Revenue

Philips image

Philips announced better-than-expected quarterly earnings on Monday, and the healthcare tech giant is starting to feel much better about this whole pandemic thing…

What does this mean?

Philips saw its revenue increase by 7% last quarter compared to the same time the year before, thanks to the ongoing – and unsurprising – demand for its respiratory machines and remote medical care equipment. Compare that to the average European company – which is expected to see its earnings drop by 26% versus the year before – and you can see why investors initially pushed Philips’ stock up 3%.

Philips stock
Source: Google Finance

The company’s expecting to keep growing this year too. Hospitals put off investing in new equipment and infrastructure at the start of the pandemic, but now they’re ready to go again. That might be why Philips signed a record number of contracts to upgrade hospital equipment last quarter – which could be just the jab in the arm the company’s future growth needs.

Why should I care?

The bigger picture: Virtual reality.

Remote care has been on the up and up amid all these lockdowns, and the demand for related equipment has been going with it. In fact, the number of US patients using so-called “telehealth” rose from 11% in 2019 to 46% by the middle of 2020. And McKinsey, for one, has high hopes for the market: the consulting firm reckons it could be worth as much as $250 billion.

Telehealth graphic
Source: McKinsey

Zooming out: Temperature check.

This is another busy week for earnings announcements, and things are already looking promising. Of the US companies that have reported fourth-quarter results so far, 86% were better than analysts expected – comfortably above the five-year average of 74%. Earnings are still down compared to last year, mind you, so maybe it’s not the time to get too excited…

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