Stock investors across the globe were greeted on Monday by declining stock prices in almost all markets. What’s going on, and what does the future hold?
To answer those questions, it’s worth understanding the basics of stock valuation.
The current price of any company’s stock is based on the future profits or earnings that the company is forecasted to generate. The present value of expected future profits depends on both the growth of the profits and the riskiness of the market. If forecasts of profit growth slow or the markets become more risky, we can see a decline in the present stock price.
Today, we’re hearing that unemployment in the United States has increased a little, domestic industrial production is slowing, and several of the big tech companies have reported profits that didn’t meet expectations. All of these factors have led investors to reassess their growth forecasts for stocks, resulting in lower valuations today. Add an uncertain market to the mix, and the overall level of market risk has spiked, further driving down prices.
The impact of this bad news isn’t felt evenly across stocks though. Tech companies like Apple and Nvidia have been hid hard because much of their value is tied up in future growth projections around AI. But consumer companies like Procter & Gamble, on the other hand, are only minimally affected—even in an economic downturn, people still buy toothpaste.
So how bad is the sell-off? It largely depends on your comparison point. At current prices, the markets have erased the past three months of growth, but the stock market overall is still up since January. Whether they’ll continue to fall—and how much—is unknown.
What should investors do? If your retirement plan or 401(k) includes money invested in stock mutual funds, the best advice is to stay the course and view the decline in prices as an opportunity to buy stocks more cheaply.
But it’s always worth checking with your financial advisor to see whether you have the correct balance of stocks and bonds in your portfolio.
Richard Warr is a professor of finance and associate dean for faculty and research of the Poole College of Management.
This post was originally published in Poole Thought Leadership.
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