The
big US stocks dominating markets and investors’ portfolios have
surged dramatically higher in recent months. That powerful run has
fueled widespread greed and complacency, leaving universal
bullishness in its wake. This just-finishing Q2’23 earnings season
reveals whether leading US companies’ underlying fundamentals
support such euphoric outlooks. These companies are thriving, but
dangerously expensive.
The
mighty flagship S&P 500 soared 19.0% between mid-March to late
July! That thrust big US stocks back into formal bull-market
territory, with that SPX powering up 28.3% at best above
mid-October’s bear-market low. That left the US stock markets just
4.3% under early January 2022’s all-time record high. It’s no
wonder euphoria reigns today after such an impressive performance,
these stock markets are on fire!
Naturally investors love chasing such strong upside momentum in the
big US stocks, rushing to pile in. But after any outsized surge
quickly catapults stock markets to seriously-overbought levels,
caution is in order. In mid-July the SPX rocketed 12.9% above its
baseline 200-day moving average, really-stretched levels
technically! That portended a rebalancing selloff, and the S&P 500
is already down 2.6% August-to-date.
The
core mission of investing is multiplying wealth by buying low then
later selling high. Opportunities for the former are long gone
after such a strong run. That has left big US stocks trading at
very-high prices relative to their underlying corporate earnings.
Valuations are extreme, running deep into formal bubble
territory! That makes buying in high today and hoping to sell even
higher later to greater fools pretty risky.
The
big US stocks’ new Q2’23 results highlight how incredibly expensive
these leading companies have recently become. For 24 quarters in a
row now, I’ve analyzed how the 25 largest US companies that dominate
the SPX fared in their latest earnings seasons. These behemoths
commanded a dumbfounding 45.3% of the SPX’s total market cap
exiting Q2! Their latest-reported key results are detailed in this
table.
Each
big US company’s stock symbol is preceded by its ranking change
within the S&P 500 over the past year since the end of Q2’22. These
symbols are followed by their stocks’ Q2’23 quarter-end weightings
in the SPX, along with their enormous market capitalizations then.
Market caps’ year-over-year changes are shown, revealing how those
stocks performed for investors independent of manipulative stock
buybacks.
Those have been off the charts for years, fueled by the Fed’s
previous zero-interest-rate policy and trillions of dollars of bond
monetizations. Stock buybacks are deceptive financial
engineering undertaken to artificially boost stock prices and
earnings per share, maximizing executives’ huge compensation.
Looking at market-cap changes rather than stock-price ones
neutralizes some of stock buybacks’ distorting effects.
Next
comes each of these big US stocks’ quarterly revenues, hard earnings
under Generally Accepted Accounting Principles, stock buybacks,
trailing-twelve-month price-to-earnings ratios, dividends paid, and
operating cash flows generated in Q2’23 followed by their
year-over-year changes. Fields are left blank if companies hadn’t
reported that particular data as of mid-week, or if it doesn’t exist
like negative P/E ratios.
Percentage changes are excluded if they aren’t meaningful, primarily
when data shifted from positive to negative or vice-versa. These
latest quarterly results are very important for American stock
investors, including anyone with retirement accounts, to
understand. They illuminate whether the US stock markets are
fundamentally sound enough to continue powering higher in coming
months, or whether a selloff is overdue.
While this recent bull run has proven very strong generating
ubiquitous bullishness, it is quite unhealthy internally. Not only
are big US stocks’ valuations at bubble extremes, this advance has
been incredibly narrow. Vast capital has flooded into fewer stocks,
leaving the S&P 500 top-heavy with record levels of concentration.
Exiting Q2, again the top 25 SPX companies alone accounted for
45.3% of its total market cap!
This
bull market has been overwhelmingly led by the usual beloved
mega-cap-tech market darlings, now called the Magnificent Seven.
They include Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and
Meta. These elite giants alone weighed in at a colossal 27.8% of
the SPX’s entire market capitalization! For all intents and
purposes, they effectively are the US stock markets. Few
other companies matter much.
There’s no doubt the M7 have awesome businesses, or they wouldn’t
have grown so large. But there is a strong groupthink component to
fund managers increasingly allocating more capital to them. These
guys can’t afford to lag their peers’ performances, or investors
flee. So when the lion’s share of market gains are concentrated in
a handful of companies, professional investors have to chase them or
risk falling behind.
They
are paying any price for these high-flying stocks, ignoring how
expensive they have become relative to underlying fundamentals.
That upside-momentum-is-all-that-matters strategy works for awhile
in bulls, but it isn’t sustainable. Sooner or later all investors
willing to buy high get fully deployed, exhausting their capital
firepower for buying. That leaves only sellers, soon sparking and
fueling major snowballing selloffs.
Apart from their extreme bubble valuations, the big US stocks’ Q2’23
looked good. But the prices investors pay for stocks really
matter! History has proven in spades that generally stocks
purchased at relatively-low prices compared to underlying corporate
earnings have far-higher odds of subsequently rallying to hefty
gains. But stocks bought at high multiples of their profits often
soon roll over into sizable losses.
Overall the SPX top 25’s total revenues last quarter climbed 3.0%
year-over-year to $1,153.5b. But that is overstated due to
composition changes. Over this past year wholesale retail giant
Costco climbed into these rarefied ranks, pushing out large
biopharmaceutical AbbVie. But COST runs a high-volume low-margin
business, with far-higher sales than ABBV. Costco did $53.6b in its
offset Q2, dwarfing AbbVie’s $13.9b.
Excluding the former from Q2’23 and the latter from Q2’22, the rest
of the big US companies actually saw their sales slump 0.5% YoY.
That isn’t much, but bubble valuations are even more precarious
without fast growth. There was a big bifurcation in revenues too,
with those Magnificent Seven mega-cap techs seeing sales surge an
amazing 8.2% YoY to $411.1b. These behemoths are mostly still
growing at vast scales!
The
rest of the big US companies including COST and ABBV only saw Q2
revenues edge up 0.4%. If they were trading at normal valuations
that would be fine, but little growth is problematic at bubble
levels. This was skewed low though by high-revenue oil
super-majors, with Exxon Mobil and Chevron suffering brutal 28.3%
and 28.9% YoY sales plunges! That was almost entirely due to
fast-falling crude-oil prices.
In
quarterly-average terms, those collapsed 32.3% YoY with Q2’23’s
running under $74 per barrel. A major driver of that was the Biden
Administration’s colossal 41% drawdown of the US Strategic Petroleum
Reserve. That flooded global markets with an extra 291m barrels of
crude oil! Had oil prices not plunged so much, big US stocks’ total
revenues would’ve looked better. But even a couple M7 stocks saw
slumps.
Mighty Apple dominates the S&P 500 with a staggering 7.6% of its
market cap. Its revenues last quarter slipped a slight 1.4% YoY on
product sales including iPhones falling 4.4%. Ominously that was
AAPL’s third quarter in a row of declining revenues, becoming
a trend! There’s no way Apple’s stock should trade way up at 32.2x
trailing-twelve-month earnings if sales aren’t growing, implying a
bigger selloff is looming.
As
goes Apple, so goes the rest of the SPX. And Apple’s retreating
sales may prove a canary in the coal mine for other big US stocks.
Americans love their iPhones, with many surveys revealing they are
the last things we’d give up. Yet with raging inflation forcing the
prices of life’s necessities far higher, people are increasingly
cash-strapped. More of their incomes are conscripted to pay for
food, shelter, and energy.
While they won’t quit buying iPhones, they’ll likely keep their
existing ones longer. Even delaying iPhone upgrades a year or two
would dramatically hit Apple’s sales. Plenty of big US stocks have
discretionary products, where customers could easily choose to buy
them less often or not at all. The resulting slowing, stalling, or
reversing revenues growth poses serious downside risks ahead for
these bubble-valued stock markets.
One
of the primary drivers of the S&P 500’s powerful 19.0% surge at best
since mid-March was this new artificial-intelligence mania. The
leader of that was NVIDIA, which designs powerful graphics
processing chips for computers that are ideal for AI work. NVDA
stock skyrocketed 106.8% in that short span, playing the leading
role in inciting bullish psychology. That left it trading at an
absurd 214.1x earnings exiting Q2!
That
meant it would take over two centuries at current profits levels
merely for NVIDIA to earn back the stock price investors were paying
for it. With a multiple like that, this company sure as heck should
have been growing gangbusters. Yet its actual sales in the
last-reported quarter which is offset from calendar ones fell a
steep 13.2% YoY! NVDA had the worst big-US-stocks revenues
performance outside of oil stocks.
So
this shrinking market leader’s extreme multiple certainly isn’t
justified. There’s also a good chance the recent AI craze filled
NVIDIA’s order book with unsustainably-large demand that will wilt.
A few years ago that happened during the cryptocurrency craze.
NVDA’s sales soared on GPU demand for mining crypto, but then
plunged when that dried up. Outsized AI demand could greatly
retreat too when this stock bubble pops.
The
big US stocks’ bottom-line accounting earnings looked fantastic last
quarter, rocketing up 61.1% YoY to $177.8b! That was despite Exxon
Mobil and Chevron seeing their big profits crash 57.6% and 48.7% on
those plunging oil prices. Yet that comparison is seriously skewed
by giant investment conglomerate Berkshire Hathaway’s unrealized
stock gains and losses, which must be flushed through income
statements.
In
the comparable Q2’22, BRK reported $66.9b in “investment and
derivative contract” losses as the SPX fell 16.4% rolling over into
a bear market. Last quarter that reversed massively to a $33.1b
gain with the US stock markets surging 8.3% higher. The easiest way
to adjust for this is simply to exclude Berkshire’s
radically-volatile profits from both quarters. That leaves big US
stocks’ earnings grimmer, falling 7.9% YoY.
Again that includes a shocking bifurcation between the M7 mega-cap
techs and the rest of the SPX top 25 ex-BRK. The M7’s profits
soared an amazing 27.7% YoY to $77.5b, these companies are still
minting money! But the 17 next-biggest US companies saw earnings
plunge 31.0% to $64.3b. Even if those two oil super-majors are also
excluded, profits still dropped an ugly 19.9% YoY to $50.4b
which is troubling.
This
raging inflation spawned by the Fed more than doubling the US
money supply in just a couple years if already eroding corporate
profits. Companies are being forced to pay higher input and labor
costs, yet can’t pass along all those price hikes to pinched
consumers. Resulting falling earnings force valuations even higher,
a clear-and-present danger for stock markets already trading deep
into dangerous bubble territory.
Corporate stock buybacks last quarter were also interesting, with
the overall SPX-top-25 number sliding 10.8% YoY to $68.0b for the
lowest since Q4’20. Those beloved M7 stocks heavily reliant on
plowing their colossal operating cash flows into manipulative stock
buybacks led the way, plunging 30.7% YoY to just $39.0b! Slowing
buybacks are bearish for stocks, as they have long been the biggest
source of demand.
The
M7 didn’t slash buybacks because their operating cash flows were
waning, those actually soared a phenomenal 34.1% YoY to $123.6b in
Q2’23! So the mega-cap techs’ managements may realize their stock
prices are way too high and overdue to correct hard. Or they may be
building their colossal cash hoards fearing a coming economic
slowdown will adversely impact their operations. Neither is good
news.
While we’re on OCFs here, the next-biggest 18 US companies excluding
the largest US bank JPMorgan Chase saw theirs plunge 31.9% YoY to
$109.2b last quarter. Like Berkshire’s earnings, huge banks have
super-volatile cash flows partially driven by markets and trading.
But booting out those oil super-majors which saw OCFs plunge, the
remaining 15 biggest US companies still enjoyed strong 23.5% YoY
growth to $74.6b.
So
overall the SPX-top-25 stocks’ Q2’23 results proved rather good, an
impressive feat given the stiff headwinds the US economy is facing.
But stock markets’ future performance again heavily depends on
stock prices. If investors are paying too much buying in really
high, they are way more likely to see big losses before big gains.
The valuations these elite market leaders are trading at are nose-bleedingly
extreme.
Overall these big US stocks’ average trailing-twelve-month
price-to-earnings ratios exiting June ran way up at 53.2x, soaring
up 107.4% YoY! Realize that historical fair value for US stock
markets over the past century-and-a-half or so is just 14x
earnings. Twice that at 28x is where formal stock bubbles
begin. Big US stocks are nearly double that thanks to the AI craze
and hopes the Fed’s violent rate-hike cycle is ending!
These extreme overvaluations are concentrated in those
market-darling Magnificent Seven stocks, as their average TTM P/Es
skyrocketed 172.1% YoY to an eye-popping 104.1x exiting Q2’23! That
isn’t just skewed high by NVIDIA’s crazy 214.1x, but Amazon is way
back up to 302.5x! Even without those ugly outliers, the other five
mega-cap techs still averaged 42.5x. Those are certainly
priced-for-perfection multiples.
Meanwhile the 18 next-biggest US stocks are also well into formal
bubble territory, averaging 33.4x TTM P/Es which blasted up 61.0%
YoY! Berkshire is the outlier here due to its colossal unrealized
investment losses over this past year. But even excluding that, the
rest of these companies still averaged bubblicious 29.3x multiples
leaving last quarter. This stock-market bubble certainly isn’t
limited to those mega-cap techs.
With
the S&P 500 just surging up 19.0% in only 4.6 months to
seriously-overbought levels stretching way up to 12.9% above its
200dma, today’s bubble valuations are a major problem. And
they could very well balloon even higher as corporate earnings come
under increasing pressure as inflationary price increases linger and
fester. Since profits really leverage sales, slowing or falling
revenues will exacerbate earnings declines.
Eventually stock prices always normalize to reflect some reasonable
multiple of their underlying corporate earnings. That portends
another major selloff looming in coming months with stock prices
so darned high relative to profits. So investors should be wary of
expanding their capital allocations to these biggest US stocks. A
major SPX selloff nearing or exceeding the 20% new-bear threshold is
growing increasingly likely.
With
these lofty stock markets riddled with euphoric and complacent
psychology, still way overextended technically, and stock prices
deep into dangerous bubble territory, downside risks are mounting.
This bull run’s primary catalysts are rapidly eroding too. That AI
mania has largely run its course, and the Fed’s violent rate-hike
cycle nearing or at its end is already priced in. Stock prices need
to mean revert back to reality.
Investors can hedge some of this selloff risk in counter-moving gold
and its miners’ stocks, which tend to surge on balance when stock
markets materially weaken. American stock investors’ gold
allocations are
virtually zero today, far below the 5% to 10% considered prudent
for centuries! And
gold and
gold stocks
are truly great buys, really beaten down after this latest
SPX bubble sucked in so much limelight and capital.
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The
bottom line is the big US stocks are still thriving fundamentally,
just reporting another good quarter. But recent months’ powerful
bull run has left stock prices exceedingly expensive, deep in
extreme bubble territory. Stocks have simply shot far too high
relative to their underlying corporate earnings, portending a major
selloff ahead. That could be a serious correction approaching 20%,
or a new bear market beyond that.
These dangerous valuations could climb even higher as big US stocks’
fundamentals deteriorate. Both these companies and their customers
are being pinched by inflation’s festering high prices. Those are
starting to slow revenues, which earnings will amplify. That leaves
stock markets increasingly vulnerable to rolling over hard.
Investors should prepare by pruning high-flying stocks and adding
counter-moving gold. |