The
big US stocks dominating markets and investors’ portfolios are
booming. They just finished reporting great Q3 results, with sales
and profits generally surging. But serious challenges loom, led by
slowing consumer spending and soaring interest rates. The stock
markets have already started rolling over again, with extreme
bubble-level valuations exaggerating downside risks. So prudent
investors are diversifying.
The
mighty flagship S&P 500 stock index has surged higher in 2023, up a
strong 14.1% year-to-date. So bullishness, enthusiasm, and greed
are running high. Speculators and investors have flooded into big
US stocks, fueling outsized gains. From mid-October 2022 to late
July 2023, the SPX blasted up 28.3% in a new bull market
climaxing in the artificial-intelligence bubble. But overall
technicals are still bearish-tinged.
That
latest bull was really an oversold bear-market rally
supercharged by AI hype. Leading into its birth, the SPX had fallen
a major 25.4% from just January to October 2022. So a
mean-reversion rebound was due, and that didn’t extend to +20%
new-bull status until early June 2023. That was when traders were
captivated with the potential of generative AI. Particularly
ChatGPT, which initially seemed like pure wizardry.
But
these large language models are just looking for patterns in text
and spitting out conforming prose. They sure aren’t intelligent or
sentient, having zero understanding of their queries or results. So
traders soon realized their current state was far from ready for
prime time. These AIs are essentially bullshitting machines,
prone to what this industry calls “hallucinations”. Those are
well-written but nonsensical answers.
So
the bloom soon fell off the AI rose, and the SPX rolled over again.
By late October it forged into formal correction territory down
10.3% since late July’s AI-bubble peak. And even that was anemic,
still 4.3% under early January 2022’s all-time-record high. So the
US stock markets still remain in a bearish downtrend since
then. Had that AI craze not stoked such greed, that latest bull
would’ve stayed a bear rally.
And
with the SPX carving lower highs and lower lows on balance during
the several months since, that AI bubble has popped. But it
peaking in Q3 made that a great quarter for big US stocks. That
surging SPX unleashed widespread euphoria, fueling strong consumer
spending driving up corporate results. That was a stark contrast to
the year-earlier comparable quarter, when the SPX’s deepening bear
retarded spending.
As
always big US stocks’ latest Q3’23 results are important for gaming
the stock markets’ likely direction in coming months. For 25
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 stunning record 46.0% of the SPX’s
total market cap exiting Q3! 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 Q3’22. These
symbols are followed by their stocks’ Q3’23 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 Q3’23 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 US stock markets are
fundamentally sound enough to resume powering higher in coming
months, or whether this correction will grow.
The
concentration of capital in these dominant US companies is shocking,
again commanding 46.0% of the entire S&P 500’s colossal market
capitalization! When I started this research thread six years ago,
the SPX top 25 represented a more-reasonable 34.8% of this entire
index. And over this past year, the most-beloved mega-cap-tech
market darlings at the very top have come to be called the
Magnificent Seven.
They
are the usual suspects Apple, Microsoft, Alphabet, Amazon, NVIDIA,
Meta, and Tesla. All have proven amazing businesses, so it’s not
surprising investors flock to them. But exiting Q3, this handful of
behemoths alone was responsible for fully 27.7% of the entire
SPX’s market cap! With such vast money deployed in so few stocks,
market concentration risks are off the charts. If the M7 sneeze,
markets catch a cold.
But
despite their monstrous sizes, the M7’s Q3 results proved
phenomenal! These mega-cap techs are firing on all cylinders, still
collectively growing fast even from already-gargantuan bases. It is
no wonder investors are so enamored with these dominant companies,
they are still delivering market-leading results. Even as a
hardened contrarian I’m blown away by what the M7 reported last
quarter, it was exceptional.
These best-of-the-best SPX-top-7 stocks reported Q3’23 revenues of
$436.8b, which soared 11.3% YoY! Double-digit sales growth at the
epic scales these giants operate should be impossible, yet they
pulled it off. That trounced the 5.9% YoY revenue growth to $784.7b
of the next 18 biggest US companies that rounded out the SPX top
25. Both Apple and NVIDIA were particularly noteworthy on the sales
front.
While still colossal, mighty Apple’s Q3 revenues actually slipped
0.7% YoY. That isn’t much, but it was the fourth consecutive
quarter of annual top-line declines. That is this company’s
worst streak of slowing sales since 2001, long before the iPhone
era! Americans love these devices, and will sacrifice much to carry
newer models in their pockets. They’ve become the main or only
computers used by most people.
Apple’s iPhone sales account for about half its revenues, and those
still grew 2.8% YoY in Q3. Overall revenues slumped because of
much-weaker Mac and iPad demand. I can’t help but think iPhones are
a bellwether for broader consumer health. As Americans struggle
with way-higher necessities prices from raging inflation, and
far-higher interest rates from the Fed fighting it, they will have
to pull in their horns.
Apple’s fiscal years end in Q3s, and in this latest one annual
iPhone sales actually slipped 2.4% YoY to $200.6b. But that
decline could steepen considerably if people are forced to delay
their upgrade cycles, keeping their existing iPhones longer. With
AAPL commanding an epic 7.0% of the SPX’s market cap, slowing iPhone
sales are a real risk for stock markets. Q4’s will be telling with
the latest iPhone 15 launch.
NVIDIA is the poster child of the AI bubble, long producing
computer-gaming graphics chips that are also great for AI’s massive
parallel processing. NVDA’s quarters end a month after calendar
ones, so these latest results are current to the end of July as that
AI mania peaked. Astoundingly NVIDIA’s revenues skyrocketed
101.5% YoY to $13.5b! That catapulted its earnings a stupendous
843.3% higher to $6.2b!
With
such stellar results, it is understandable NVDA’s stock price shot
stratospheric up 249.4% between the ends of Q3’22 to Q3’23. No
other SPX-top-25 stock came close to matching NVIDIA’s colossal
upside. But are these extreme AI-mania sales levels sustainable?
Will AI companies keep scrambling to stockpile the latest NVIDIA
processors as their investment capital inflows wane? Odds are they
won’t be able to.
When
NVIDIA reported those blowout results in late August, it also guided
to $16.0b in sales in Q4 which smashed Wall Street estimates of
$12.5b! Long-time professional analysts marveled at what they
called the best quarterly report in history. Yet NVDA stock still
topped right then and has ground lower since. If this company warns
on slowing sales, it could really taint broader market psychology
spawning wider selloffs.
Partially thanks to those incredible Magnificent Seven revenues,
overall SPX-top-25 sales grew a strong 7.8% YoY in Q3 to a record
$1,221.5b. But one big composition change really distorted this.
Over the past year, beloved warehouse retailer Costco replaced Pepsi
as the 24th-largest US stock. Everyone I know who shops at Costco
including me raves about its high-quality food sold at the lowest
prices anywhere.
Costco’s margins are razor-thin to pass along bulk-buying savings to
customers, with membership fees accounting for fully 70% of its Q3
earnings! COST’s sales are about 3.5x bigger than PEP’s. If Costco
is included in the year-ago comparable quarter instead of Pepsi,
SPX-top-25 sales growth is slashed to 3.2% YoY. And for the
next-18-biggest US companies under the M7, total revenues actually
slump 0.8% YoY!
These elite US stocks’ Q3 earnings were also distorted, for two
different reasons. Overall the SPX top 25’s accounting profits
surged an impressive 14.7% YoY to $184.2b. The M7 mega-cap techs
dominated that, with their earnings skyrocketing an astounding 49.0%
YoY to $94.4b! While extraordinary, there’s no way such epic
profits growth can persist at such vast operating scales. That has
to greatly moderate.
But
the next-18-biggest SPX stocks saw earnings drop a considerable 7.7%
YoY to $89.8b last quarter. That sounds ominous economically, but
it partially resulted from huge unrealized investment gains and
losses that Warren Buffett’s Berkshire Hathaway has to flush through
its income statements each quarter. In Q3’23 for example, BRK
reported $29.8b of investment losses that crushed earnings to an
ugly $12.8b loss!
Yet
year-to-date as of Q3’23, BRK still has $38.0b of investment gains
boosting net income to $58.6b. If Berkshire’s crazy-volatile
investment losses are backed out of both Q3’22 and Q3’23, overall
profits at the next-18-biggest US stocks actually climbed a good
8.1% YoY to $119.5b. But that was greatly boosted by another
unusual item, Johnson & Johnson’s ongoing spinoff of its
consumer-health businesses in Kenvue.
Related to divesting those assets, in Q3 JNJ reported an enormous
non-cash gain of $21.0b that was run through net income! Pull out
that one-time windfall, and the next-18-biggest US stocks’ Q3
profits actually plunged 10.9% YoY to $98.6b! That also guts
the overall SPX top 25’s earnings enough to drag them to a mere 1.6%
YoY increase even including mega-cap techs’ awesome results, so
cracks are starting to show.
Q3
could very well prove the high-water mark for consumer spending,
which drives corporate profits, for a long time to come. The Fed
reported that Americans’ epic $2,100b of excess savings from
pandemic stimulus payments were finally exhausted in Q3. And
the 3.5-year pandemic moratorium on student-loan payments also ended
in September. So about 1/6th of Americans will now have to pay
around $390 per month.
That
combined with those inflation-ballooned necessities prices and
punishing interest rates will have to increasingly erode Americans’
spending. As they buy less goods and services from these elite
SPX-top-25 companies, their revenues and earnings will come under
increasing pressure. It seems like they know a slowdown is looming,
as they cut their massive corporate stock buybacks despite the SPX
surging into Q3.
Overall buybacks dipped 8.6% YoY to $74.3b last quarter, led by the
cash-rich Magnificent Seven’s falling a steeper 12.4% to $48.3b.
Despite much-better earnings, Apple, Microsoft, NVIDIA, and Meta all
slashed their buybacks substantially. Why? The M7’s overall cash
hoard still soared 20.1% YoY to an astounding $492.8b! Their
operating cash flows rocketed up 36.6% YoY to $134.1b, they are
rolling in money.
Overall the SPX top 25’s stock buybacks have now fallen for six
consecutive quarters, averaging hefty 15.5% YoY declines!
That’s quite a trend, contrary to their normal behavior of using
their cash flows to bid up share prices while artificially boosting
earnings per share. There has to be some reason why these elite
companies are slowing this core strategy. They likely fear economic
weakness or see lower stock markets.
While the biggest US stocks’ Q3 results were spectacular, their
bubble valuations remain a serious threat. Exiting last
quarter, the SPX top 25 averaged trailing-twelve-month
price-to-earnings ratios running way up at 38.3x! That is far
higher than the 28x bubble threshold, which in turn is double the
century-and-a-half fair-value average of 14x. These stock markets
remain exceedingly expensive, even dangerously so.
Those valuations soared 31.1% YoY, exceeding the SPX top 25’s
collective 27.0% market-cap gain! That means the SPX’s rally has
been largely driven by multiple expansion, paying more for
underlying profits. The M7 mega-cap techs are even more extreme,
averaging shocking valuations way up at 58.1x earnings! So these
stock markets are crazily-overvalued, greatly upping the odds
another bear is getting underway.
Alphabet and Apple were the cheapest M7 stocks at the end of Q3, but
still traded at 28.5x and 28.6x which is high historically for
both. The most expensive were Amazon and NVIDIA at a whopping
105.4x and 105.3x. That means at current earnings levels, investors
would have to wait 105 years for these companies to earn back their
lofty stock prices! Historically bubble valuations have heralded
secular bears.
Those fearsome beasts exist to maul stock prices sideways to lower
long enough for underlying earnings to catch up with stock prices.
Great valuation waves meander through market history, with
overvalued markets after bulls yielding to undervalued ones after
bears. At 38.3x earnings, a valuation-wave mean reversion much
lower in coming years is highly probable. That would guarantee
much-lower stock prices.
And
increasingly-tapped-out American consumers really exacerbate stock
markets’ inevitable downside. As they tighten their belts and
become more selective with their spending, corporate sales will
weaken. The resulting earnings drops will be much bigger,
amplifying the revenue declines. And lower profits force
valuations even higher, demanding bigger mean-reversion selloffs
to normalize stock prices with earnings.
Eventually stock prices must reflect some reasonable multiple of
underlying corporate earnings. It may be that historical 14x, or
perhaps higher now near 21x. But either way, fair value is far
lower than 38x. The prices investors pay for stocks, the valuations
at which they buy, are the biggest driver of their long-term
returns. So with today’s extreme bubble valuations, investors need
to stay wary of a major bear.
The
SPX top 25’s total dividends paid last quarter climbed a normal 1.6%
YoY to $41.7b. Yet average dividend yields on these lofty stock
prices collapsed 16.7% YoY to just 1.6%. In past years when
the Fed was running zero-interest-rate policies, low dividend yields
were all investors could get. But today 1-year Treasury yields are
running 5.4% thanks to the Fed’s monster rate hikes, dwarfing big US
stocks’ yields!
Investors looking for income in big US stocks aren’t earning much,
and are facing major downside risks with valuations so extreme.
Meanwhile risk-free short-term Treasuries are yielding 3.4x more
with capital return guaranteed! So diversifying into bonds makes a
lot of sense with dividend yields lagging terribly. That’s another
major reason stock prices need to mean revert much lower, to
normalize terrible dividend yields.
Not
surprisingly with strong revenues and earnings last quarter, the SPX
top 25’s operating cash flows were also robust growing 11.4% YoY to
$260.4b. But again that was skewed by the M7 mega-cap techs’
incredible 36.6% YoY growth! The next-18-biggest US companies
actually saw their OCFs collapse by 15.1% YoY. That excludes
mega-bank JPMorgan Chase, which always has wildly-volatile huge OCF
swings.
Those big OCFs for the SPX top 25 boosted their collective
treasuries a similar 11.0% YoY to $909.2b. Yet the M7 sported huge
20.1% growth, while the rest of the biggest US stocks’ cash hoards
only edged up 1.8%. So the enormous bifurcation between mega-cap
techs and the rest of leading stocks remains in force. Sooner or
later that gaping disconnect has to narrow, with another bear
market the most-likely driver.
Ironically because of the Magnificent Seven’s amazing businesses,
investors consider their stocks to be safe. But that’s not true
during stock bears, the mega-cap techs lead the markets both on the
way up and down. Again the SPX’s last bear mauled it 25.4% lower
over 9.3 months from January to October 2022. During that exact
span, AAPL, MSFT, GOOGL, AMZN, NVDA, META, and TSLA stocks fared
much worse.
They
averaged ugly 41.8% losses while that bear prowled, and actually
fared much worse from their own peaks to troughs. Between October
2021 to December 2022 surrounding that bear, at worst these elite M7
stocks dropped 30.8%, 37.6%, 44.3%, 55.7%, 66.4%, 74.4%, and 73.4%!
That made for dismal 54.6% average losses, more than double
that 25.4% SPX bear! M7 market darlings offer no refuge in bears.
Investors with stock-heavy portfolios really ought to diversify into
gold, which tends to outperform when stock markets weaken. During
that last SPX bear gold still slumped 7.1%, but only because the
US dollar
skyrocketed parabolic on unprecedented monster Fed rate hikes.
Since that ended, gold powered up 26.3% at best in a strong new
upleg. Yet the SPX’s parallel bear-market rally only climbed 11.1%
in that span.
Successful trading demands always staying informed on markets, to
understand opportunities as they arise. We can help! For decades
we’ve published popular
weekly
and
monthly
newsletters focused on contrarian speculation and investment. They
draw on my vast experience, knowledge, wisdom, and ongoing research
to explain what’s going on in the markets, why, and how to trade
them with specific stocks.
Our
holistic integrated contrarian approach has proven very successful,
and you can reap the benefits for only $10 an issue. We extensively
research gold and silver miners to find cheap fundamentally-superior
mid-tiers and juniors with outsized upside potential. Sign
up
for free e-mail notifications when we publish new content. Even
better,
subscribe today
to our acclaimed newsletters and start growing smarter and richer!
The
bottom line is big US stocks just reported great Q3 results, with
revenues, earnings, and operating cash flows enjoying strong
growth. Business boomed as the AI bubble peaked, heavily weighted
to the Magnificent Seven mega-cap techs increasingly dominating
stock markets. But these gigantic companies can’t enjoy
double-digit sales growth forever at the vast scales they operate,
and their valuations remain extreme.
Deep
into dangerous bubble territory, a mean reversion is still long
overdue. That requires a bear to maul down stock prices long enough
for corporate earnings to catch up. Tapped-out Americans slowing
their spending could soon awaken and feed that beast. Pulling in
their horns threatens really eroding sales and crushing profits,
forcing lofty valuations even higher. Facing big downside risks,
investors need to diversify. |