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Market Watch Weekly | October 26, 2021 | Value is in the Eye of the Beholder

Erik Dekker - Oct 26, 2021
The buy the dip mentality continues to be on display with the S&P 500, Down Jones Industrial Average, and S&P TSX all hitting new all-time-highs this week. The tech-centric NASDAQ remains the only laggard as interest rates have been creeping higher..

The buy the dip mentality continues to be on display with the S&P 500, Down Jones Industrial Average, and S&P TSX all hitting new all-time-highs this week. The tech-centric NASDAQ remains the only laggard as interest rates have been creeping higher in October, which discounts the future cashflows of these high-growth companies (more on that later). After the September swoon that produced the first 5% pullback of the year, the stock market has regained its footing, spurred by a strong start to corporate earnings season which kicks into overdrive next week. We came in to 2021 with a positive outlook, and the market has not disappointed.

Specifically, we thought earnings growth would be the primary guide for returns, with elevated valuations (P/E ratio) unlikely to expand further. This has been the case, with valuation levels holding fairly steady. However, gains in the S&P 500 and TSX have been particularly strong, thanks to robust earnings growth so far, including a nearly 100% yearover- year increase in S&P 500 profits in the second quarter. We expected a rotation in equity-market leadership, which has occurred as the "risk on – risk off" oscillation in investor sentiment prompted periodic outperformance phases between value and growth investments.

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