The Stock Market Is Crazy. Why It Makes Total Sense.

The stock market can make perfect sense—even when it doesn’t feel like it.

Yes, the market has appeared particularly chaotic of late, with stocks dropping, jumping, dropping, and jumping again. But take a step back, and first-quarter earnings season—now nearly over—explains much of the action.

Take the rotationout of techinto value, one of 2021’s big themes. The Nasdaq Composite,home to richly valued tech stocks like Tesla and Netflix,is up 5% this year, while the Dow Jones Industrial Average,home to old economy stocks like Caterpillar and Home Depot,is up 11%.

Puzzling? Not really. Earnings growth was slightly better for Nasdaq companies than for Dow components, but the stock market is always about expectations. Some 86% of Dow companies topped Wall Street projections, while only 61% of Nasdaq companies beat theirs. What’s more, the Nasdaq came into earnings trading at about 35 times estimated 2021 earnings. The Dow was trading at 21 times.

Earnings season hasn’t changed much. The Dow, now at 20 times earnings, still trades at a big valuation discount to the Nasdaq, at 32 times. Second-quarter comparisons to a dreadful pandemic affected 2020 should look great for Dow firms.

That’s one way of saying the rotation doesn’t look done quite yet.