Lin Liu
Lin Liu
Austria
1mo
Two Things that Drive The Market Stocks are driven mainly by 2 things: earnings and sentiment. Earnings are what give a business its real value over time. They show whether a company is growing, becoming more profitable, gaining market share, and building something durable. In the long run, stock prices usually follow the direction of earnings because eventually fundamentals matter. Sentiment, on the other hand, determines how much investors are willing to pay for those earnings today. It reflects confidence, fear, optimism, pessimism, positioning, momentum, and expectations about the future. Sentiment can push prices far above fair value when people get excited, and far below fair value when fear takes over. That is why markets often seem irrational in the short term. Stocks can rally during negative headlines if investors were already expecting something worse. They can also fall after strong earnings reports if expectations had become too high going in. The reaction is often less about the news itself and more about whether reality was better or worse than what people had already priced in. In the long run, earnings usually win. In the short run, sentiment often takes over. The software selloff is a perfect example. Many investors worried AI would destroy traditional software moats, compress pricing, or turn products into commodities. So many software names sold off even before the actual impact was clear. It did not matter how strong or durable the individual businesses were. When fear hits a sector, correlations often move toward 1. Investors stop focusing on differences between winners and losers and start selling the whole group. Sentiment became the main driver. Great investors understand both forces. They track fundamentals, but they also respect psychology, positioning, fear, greed, and momentum. Right now, earnings in many areas remain resilient, while sentiment has rebounded from skepticism and fear. That combination is what triggered this strong rally. That is a major reason stocks are back at record highs. Interestingly, forward EPS is rising faster than it did during the mid 1990s boom or even the late dot-com era. Those were some of the strongest profit expansion periods in modern market history, yet the current pace is now competing with, or surpassing, them. That kind of melt-up in profits, without a recessionary washout beforehand, is extremely rare and arguably close to unprecedented in modern market history. This is the AI boom in real time. If you think the market is wrong for going higher, start by checking the earnings backdrop. It is easy to argue with price, but it is much harder to argue with rising profits. Yes, over time price often moves ahead of earnings and tries to discount what is coming next. But right now, this is not just a story of hope or speculation. Earnings are growing significantly, forward estimates continue to move higher, and now investors who stayed defensive are beginning to come off the sidelines and chase performance. The S&P 500 technology sector is only about 2% below its 52 week highs on price. On the surface, that looks like a market still trading near peak levels. But underneath, the valuation picture looks completely different. The sector’s forward price-to-earnings multiple is down roughly 28% from its highs. In other words, investors are paying materially less for each dollar of future earnings than they were before, even while prices remain near the top of the range. That is actually a healthy sign. It means this is not just a rally built on excitement or speculative multiple expansion. It suggests the move is being supported by real earnings power, which is usually far more durable over time. I continue to be very positive, and I will stay that way until the data gives a real reason not to. Does that mean the market cannot pull back or pause here? Of course not. Short-term moves happen all the time. What it means is that I will continue to view pullbacks, volatility, and drawdowns as opportunities rather than reasons to panic. The biggest and most important piece of this entire market puzzle remains earnings. Over the long run, stocks tend to follow one thing above all else: the direction of corporate earnings. If earnings estimates keep getting revised higher and businesses continue to grow profits, stock prices usually follow over time. If we do see a pullback in the coming weeks as a sell-the-news reaction to big cap tech earnings, I would likely view that as an opportunity to add exposure or rotate into the strongest leaders. Unless we get something truly catastrophic or meaningfully worse than expected from these reports, the broader direction of the market still looks clear in the bigger picture.
Not investment advice. The author may have financial interests in the mentioned instruments.
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