Recent quotes:

A $500 Billion Haul Reignites Passive Controversy on Wall Street - Bloomberg

Contrary to popular claims that the price-agnostic money is fueling market distortions by blithely lavishing capital just to the largest companies, a Goldman Sachs Group Inc. study showed the role of fundamentals, like the stability of corporate earnings, remains an all-powerful driver for stock valuations. Meanwhile, passive players hold a far weaker sway, if any. Similarly at Citigroup Inc., a team led by Scott Chronert found that active managers themselves exert a far bigger influence than their passive rivals on a stock’s performance relative to its industry. It’s a rebuttal to critics like AllianceBernstein’s Inigo Fraser Jenkins, who have alleged that index players are distorting asset prices to a unique degree.
#predictions #stocks #etf - bloomberg.com

Index funds : everyone is going the same direction

Index funds have exploded in popularity for good reason—they’re cheap, easy to buy, and have historically outperformed most actively managed funds. But people are forgetting one crucial fact: past performance does not guarantee future results. The stock market doesn’t care about your neat little charts showing average annual returns. And while the S&P 500 has indeed delivered solid returns over the long run, there have been brutal stretches where it’s gone nowhere. Just ask anyone who invested during the 2000s and saw their portfolio flatline or lose value for ten years. Today, we’re walking into a similar trap. Money is flooding into index funds like never before. These funds now control over 60% of the U.S. stock market. But what happens when everyone piles into the same investment? Valuations get bloated, returns get squeezed, and eventually, the whole thing comes crashing down. If you think the stock market is a guaranteed money machine, think again. It’s setting up to punish those who are following the crowd without thinking.
#cult #stocks #valuation #indexfunds - x.com

Financial Statement Analysis with Large Language Models by Alex Kim, Maximilian Muhn, Valeri V. Nikolaev :: SSRN

Even without any narrative or industry-specific information, the LLM outperforms financial analysts in its ability to predict earnings changes. The LLM exhibits a relative advantage over human analysts in situations when the analysts tend to struggle. Furthermore, we find that the prediction accuracy of the LLM is on par with the performance of a narrowly trained state-of-the-art ML model.
#prediction #LLM #stocks - papers.ssrn.com

Taking a Disciplined Look at Irrational Investors | Yale Insights

The idea that might be most important about how we form beliefs is overextrapolation. It’s just saying that when we form beliefs about the future, we put too much weight on the recent past. If the recent returns on an asset have been good, we’re too quick to think that the future returns will be good. If they’ve been bad, we’re too quick to think they will continue to be bad.[…] this simple idea can shed light on a lot of key puzzles. One of them is excess volatility—the finding that, historically, the stock market has moved around more than can be explained by simple, rational models of investor behavior.[…]Overextrapolation may also explain bubbles. I’ve also done work trying to understand where overextrapolation comes from. I argued, in one of my first papers, that an idea of Kahneman and Tversky’s called representativeness may be an important driver of overextrapolation. When we see a good economic data point, we leap to the conclusion that it represents a positive trend. Representativeness is a possible source of this overreaction in financial markets.
#markets #stocks #overextrapolation - insights.som.yale.edu

‘Confusing Time’ for Managers Weighing Stock Bubble, Page Says - Bloomberg

If I look at the price-earnings ratio on the S&P 500, it’s in the 99th percentile compared to the last 30 years. But if you think stocks are expensive, have you looked at bonds recently? And if you compare the valuation of stocks -- that PE ratio, and you can invert it and look at the yield, which makes an easier comparison -- with bond yields and in particular real rates -- the yield you get on bonds after inflation -- then you get to the conclusion that it’s in the bottom 1%. So stocks are as cheap as they’ve ever been.
#pricing #bonds #stocks #valuation - bloomberg.com