Here’s the pickle. We all know that more money is in passive funds than active funds these days which do not really care about valuations. They are merrily chasing the stock market as it moves.
Besides the billions of dollars flowing into retirement funds every two weeks, the year by year flow of money into passive instruments has also grown. is your prime example. It will be bought based on its market cap relative to the rest of the market, no one cares why its overvalued.
To add, isn’t the stock market a federally protected asset? Many Americans depend on their portfolios to fund their retirement, so I’m sure the government has measures in place to ensure a big crash doesn’t happen. We have tools to help foresee crashes and at that point the government would do something to avoid a crash.
So the question is, are metrics like PE, D/E, CAPE even useful anymore?
That’s a valid concern, however, in a broader sense valuations do matter and will continue to matter for individual securities.
You are right about the money flowing into passive funds and the appeal of individual stocks is subjective, but there are still many active investors out there.
This has been discussed before and many believe that if the majority of funds go into passive indices, the market will provide more opportunities for active investors
the issue is that the majority of the active investors are following the trail left behind by retail investors and only invest in companies that follow particular themes like tech, AI, etc.
They will pump up an overvalued stock thinking they are being rational but in reality, they are simply reactionary/greedy. Even the best hedge fund investors have to bend and embrace what's popular or their clients would take their money elsewhere.
Candle go up--Buy, Candlego down-- Sell
In most cases, if a company underperforms, its stock may fall. Furthermore, in an overall rising market, those underperforming securities may rise with the market. But almost always fall if the market fails. This makes taking into account a company’s fundamentals as well as overall trend necessary when evaluating stocks.