Yes, prevailing sentiments can undoubtedly influence the valuation of a company.
Prevailing sentiments is vague and undefined term. Yes, market sentiments is a word found in literature. Valuations of any assets as a matter of principle depends on present value of future cash flows for a period generally 7-10 years depending on risk profile of investor. Sometimes it may be just 5 years .There is another term called internal rate of return. Fair value of stocks are calculated in many ways but most common being discounted cash flow method. Risk profile and future growth potential play big role. If the stock belongs to a company in high technology area, sunrise sector, has virtual monopoly or oligopoly with less than 4 players who secretly form cartel (like in telecom, graphite electrode, high CC engine motorbikes ) and has a patent or brand value , the valuation in terms of PE will be much higher than conventional PE ratio of 15-20 like in case of Nestle India or Pidilite .The valuation of commodity stocks is much lower generally .So in short, risk factor and future earning potential influence the valuation significantly. When entire market collapses like in corona pandemic time, all stocks will get devalued as risk goes high .In that time pharma companies did much better .Even Pfizer wiped off past losses and came in huge profit. This has nothing to do with market sentiments
Investor sentiment can have a significant impact on the stock prices of individual companies. For example, if investors are optimistic about the economy’s prospects, they may be more willing to invest in stocks, causing the price of a company’s shares to rise. In contrast, if investors are pessimistic, they may be more likely to sell stocks, causing the price of a company’s shares to fall.
Other factors influencing prevailing sentiments include news events, economic indicators, and central bank and government actions. For example, if a company reports strong earnings and promising growth prospects, investors may become more optimistic about the company’s prospects, resulting in a higher valuation. On the other hand, if a company receives negative news, such as a scandal or legal issues, investors may become more pessimistic, leading to a lower valuation.
I believe what Rajendra K. Gupta is saying is that a rising tide floats all boats, but when the tide goes out we find out who has been swimming naked.
James E. Larsen I did not mention like that , though it is true as observed by you. I have talked on intrinsic value of stocks and securities. How risk factor and potential earnings determine rates of various investment opportunities. But when economy comes out of recessionary loop of economic cycle, the over all markets get buoyed too with junk too floating up. Even different sectors have business cycles for example steel and real estate 8 years roughly. To identify these needs detailed analysis and watch . Average investor cant discern real value as he would remain out of investing since most stocks he cant pick being over valued if he goes by his academic valuation. These are based on optimism and pessimism and human greed factors and lack of complete knowledge. Companies suddenly collapse as some factor goes wrong like government banning certain things out of public interest. Hence uncertainty is built in investing . To take good entry point and profit taking are must for being profitable
The notion that investors depend on sentiments cannot stand true because it amounts to counting the investment theory as false economics and investors are all stupid.
The mistake is that the common people believe that share values depend on the numbers reflected in the books. This is untrue.
For example, how much salary you like to decide for your employee?
It does not depend on what he did in the last ten years rather it depends on what wonders he can do for the future production and sales of your company.
The fact is that the future is not so easy to predict.
Yes I agree. But of course, the prevailing expectations of the participants in such transactions themselves should be taken into account first of all.
The advocates of the psychological approach to investment believe that the market is led by sentiments or panic. Advocates of no other school of thought support it or believe it.
Secondly, while institutional investors equipped with strong equity research dominate the market, small household investors with psychology have only a limited role to play in the market. After all, they cannot lead the market.
Finally, the management of institutional investors will hardly gamble (i.e., depending on the sentiment) because their compensation and perquisites depend on what value they can make for the investors
Even though numbers play a major part in valuation, sentiments also will be considered
The influence of feelings and emotions on the market is inevitable. First of all, participants in specific transactions experience such influence in their cash flow forecasts and implied risks. Through them, this influence spreads to the entire market by fixing the levels of market multipliers and interest rates. As for professional (independent) appraisers, they are less influenced by feelings, however, they cannot completely exclude it, since they are immersed in the market environment, and not in a vacuum.