The driving force behind Gametop’s (NYSE:EMG) The initial community-driven surge was due to an overly liquid market and analysts’ event predictions. Going forward, however, investors will want to understand why the variables influencing GME stock are likely to change.

At this point, I imagine readers aren’t quite sure what to believe with GME stocks. There is a dearth of accurate information when it comes to meme stocks. Thus, the argument behind this article is aligned with solid theoretical foundations as well as anecdotes based on my previous experiences with pricing. savagely speculative assets.

Here’s what you need to know about GME stocks going forward.

GME stock and the impact of volatility

For GME stocks, it may be best to start with a technical approach. After all, the stock has been somewhat disconnected from its fundamentals, to say the least.

So, GME from a technical point of view? GameStop stock has a notable negative correlation with the CBOE Volatility Index (VIX). This suggests that investors are unwilling to spend their money on it during a generalized market downturn.

Source: GuruFocus

Going forward, we are likely to experience continued volatility. A sudden shift in monetary policy is upon us, with analysts expecting up to seven interest rate hikes This year. Additionally, pandemic-induced industrial shifts have created uncertainty among investors, causing significant sector rotation in the markets. JPMorgan analyst Gabriela Santos had the further to say:

“Volatility will stay higher for longer […] We only expect beta returns going forward of 4.3% annualized. So we had to work harder to generate the same returns as the last cycle. And that’s where the alpha comes in.

The ripple effect here for GME stocks is that risk investors will likely run for the hills once they see that the broad indices are struggling to find direction. This is what has been conveyed by the VIX so far.

Market Fundamentals and Effectiveness

The efficient market hypothesis is a term most of you have probably heard during the meme craze. Still, I feel like many don’t quite understand what market efficiency is. means. I would like to explain this by contextualizing investors’ utility cycles.

Stock market participants will continue to invest as long as their expected returns for their given levels of risk are met. This is why we see dynamic patterns forming and collapsing over and over again. Thus, the broader market is constantly moving away and regaining some form of market efficiency.

So how do we assess this? We can use the S&P500 price-earnings ratio (P/E). The P/E ratio essentially provides us with a function of the market price of a stock relative to an investor’s residual claim. We have seen the market drift away from efficiency during the pandemic as an ultra expansionary monetary framework entered the picture. However, over the past few months, the P/E of the S&P 500 has fallen from 39.9 in December 2020 to around 25.0 today. This is still considered to be well above the index’s equilibrium range between 13.0 and 15.0but it does mean the market is looking for stocks with stronger fundamentals in an attempt to regain efficiency.

GME stock could be one of the big losers in this readjustment process due to its shaky fundamentals. Of course, the stock had a short squeeze and traded with everything unrelated to the company itself. But we have to consider variable change, which means its influencing factors will change linearly with time.

Observing the dynamics of GME stock, it is difficult to say that its demand will increase in a financial market in search of efficiency. Video game sales have been down for a few months, with a 2% drop in January. This is important given that retail sales have increased by 3.8% over more or less the same period. Additionally, GME faces headwinds from a more commodity-oriented consumer base as inflation drags down overall economic growth. A shift in the consumer cycle could hurt meme stocks, as they are already trading on shaky ground with artificially inflated prices.

The NFT Argument

The final point to consider for GME stock is the non-fungible token (NFT) argument. Right now the reality is that the NFT space looks set to stay, but with any hot prospect comes fierce competition.

This then causes the new “idea” to lose its company-specific added value for GameStop. The consequence of this? The market begins to price the asset based on the quality of the idea financially validated instead of how groundbreaking it is.

Need an example? We have seen this happen with Metaplatforms (NASDAQ:Facebook) when it crashed more than 30% after the company reported lower-than-expected revenue from its metaverse segment.

What now for GameStop?

So what should investors do with GME shares?

All in all, I don’t think it’s the right time to take a risk on a stock that was carried by everything but solid fundamentals. Yes, GameStop is turning to NFTs and establishing a few key partnerships to modernize its business. But the fact remains that the market evolves with high volatility and calls for efficiency. That doesn’t look good for GME.

As of the date of publication, Steve Booyens held no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has since been responsible for equity research and public relations. Prior to founding the company, Steve held various finance positions in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency and ESG.