The
red-hot US stock markets continue to power inexorably higher,
fueling extraordinary complacency and euphoria. With stocks riding
an extreme deluge of Fed money printing, selloffs are minor and far
between. But are these seemingly-perpetual gains to endless lofty
record highs justified fundamentally? The big US stocks’
winding-down Q1’21 earnings season illuminates how these elite
companies are faring.
The
performance of the flagship US S&P 500 stock index (SPX) has been
amazing. In the first quarter of 2021, this dominant stock-market
benchmark surged 5.8%. During those 61 trading days, the SPX hit
new all-time-record closes on fully 15. The SPX stretched as high
as 17.0% above its baseline 200-day moving average,
extremely-overbought territory. Yet traders think the Fed has
rendered material selloffs extinct.
Still in panic mode, that profligate central bank is conjuring up
$120b per month out of thin air to monetize bonds! The Fed’s
balance sheet, which is a proxy for the total number of US dollars
in circulation, surged by 4.4% or $326b in Q1’21 alone. That
annualizes to an almost-18% monetary-inflation rate. Some of that
relentless flood of new fiat dollars from quantitative easing
inevitably finds its way into stock markets.
The
tidal wave of monetary liquidity sweeping stock prices higher is far
larger than that. In March 2020 as stocks plummeted in a
lockdown-induced panic, Fed officials were terrified the negative
wealth effect would spawn another depression. So they spun up and
overclocked their printing presses to truly-dizzying speeds. From
the ends of Q1’20 to Q1’21, the Fed’s balance sheet skyrocketed
46.3% or $2,435b!
Those extreme monetary inflows are why the S&P 500 soared
53.7% higher in that same span. In the year leading into that stock
panic, the Fed’s balance sheet grew a normal 4.6% or $184b. In the
year after, it mushroomed a monstrously-grotesque 82.5% or $3,431b!
It should be no surprise that such a radically-unprecedented
diluvian torrent of liquidity directly catapulted the US stock
markets far higher.
Virtually all traders agree the Fed’s largesse fueled this
extraordinary US-stock-market rally. But while bulls think the
resulting super-high stock prices are righteous given the US
economic recovery, bears are convinced they are an
exceedingly-dangerous Fed-blown bubble. Four times a year after the
quarterly earnings seasons, the rubber meets the road for comparing
underlying corporate performances to stock prices.
American companies have 40 days after quarter-ends to report their
latest operating and financial results. With 35 of those days
passed as of the middle of this week, most of the big US stocks have
reported their Q1’21 performances. Every quarter I wade through the
latest official 10-Q quarterly reports required by the Securities
and Exchange Commission for the 25 largest SPX stocks. They
dominate nearly all portfolios.
At
the end of March, these giant companies accounted for 40.8% of the
weighting of the entire S&P 500! The colossal S&P 500
exchange-traded funds are the biggest in the world. The SPY SPDR
S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500
ETF commanded a staggering $363b, $278b, and $221b of investors’
capital this week. Retirement funds are heavily weighted in the SPX
top 25.
And
since stock-market performance affects so many other markets,
the SPX top 25’s quarterly results are very important for all
speculators and investors. Capital flows into and out of bonds, the
US dollar, and leading alternative assets like gold and
cryptocurrencies are heavily influenced by stock-market fortunes.
So closely watching the big US stocks’ price trends and fundamentals
is universally important for all traders.
This
table outlines key fundamentals of the 25 largest companies
in the US stock markets. Their stock symbols are preceded by how
their rankings within the SPX shifted in the year since the end of
Q1’20. After their symbols these companies’ actual percentage
weightings within the S&P 500 at the end of Q1’21 are shown, along
with their market capitalizations in billions back when that
reporting quarter was ending.
Their market caps, as well as their other fundamental data, are
followed by year-over-year changes from the ends of Q1’20 to Q1’21.
Looking at market-cap changes offers a purer read on companies’
values than stock-price changes, normalizing out some manipulative
effects of corporate stock buybacks. Those are done to
artificially boost share prices and earnings per share,
maximizing executives’ compensation.
Quarterly revenues, GAAP corporate profits, earnings per share,
trailing-twelve-month price-to-earnings ratios as of quarter-end,
dividends paid, and operating cash flows generated are shown. These
key data are also followed by YoY changes. Blank fields usually
mean a company hadn’t reported that particular data as of mid-week.
Disney for example is dragging its feet, keeping shareholders
waiting until May 13th.
Percentage changes are also excluded if they are misleading or not
meaningful, primarily when data shifted from positive to negative or
vice versa. Unfortunately some companies run goofy fiscal quarters
offset from calendar ones, making them harder to compare with their
peers. Walmart, Home Depot, and NVIDIA report on quarters ending
one month later than normal. So their latest-reported quarters are
included.
The
elite big US stocks dominating the S&P 500 reported spectacular
performances last quarter! But they sure as heck should have
with the Fed nearly doubling the US-dollar supply, and most
Americans showered with helicopter-money direct payments from the US
Treasury. Those stimmies were quickly spent, unleashing huge demand
for the goods and services many of these massive companies produce.
The
beloved Big Five mega-cap tech stocks in particular continue to
reign over the SPX and entire US stock markets. Apple, Microsoft,
Amazon, Alphabet, and Facebook were strong-performing universal
market darlings before the pandemic lockdowns hit. Then the
resulting epic shift towards spending far more time at home proved
incredibly beneficial for them. They alone now account for 21.0% of
the S&P 500!
That
is more than the next 20 largest US companies in this table, which
collectively weighed in at 19.8%. And the Big Five’s performances
in Q1 were utterly astonishing. There continues to be a vast
bifurcation between the gravity-defying numbers they are putting up
and the rest of the US stock markets. So how the big US stocks are
doing fundamentally has to be considered as mega-cap techs versus
everything else.
The
total market capitalizations of the SPX top 25 skyrocketed 53.7%
year-over-year to a record $14.6t. The top four mega-cap techs each
sported dumbfounding trillion-dollar-plus market caps! Like massive
oil supertankers with so much inertia that they are very slow to
start, stop, and turn, the colossal sizes of these behemoths limit
their stock-price upside potential. The capital inflows required to
propel them are vast.
So
what did that $2,435b of Fed money printing in the year ending March
31st buy? Incredible growth in the big US companies’ businesses.
Together all 25 reported total revenues of $921b, which surged a
record 15.6% YoY! Yet that total remained well short of Q4’19 when
the SPX top 25’s sales hit $949b. That is mostly a component-mix
issue, with smaller high-flying tech stocks muscling their way into
the top 25.
As
an example, cellular-telephony giant AT&T was the 16th largest
American stock in Q1’20. It reported nearly $43b in revenues in
that comparable quarter. Yet by the end of Q1’21, it had been
forced down to 27th. Replacing it newly into the rarefied ranks of
the SPX top 25 was the computer-graphics-chip leader NVIDIA, which
only had $5b in sales last quarter. Disney’s latest quarterly
results missing in action contributed.
But
those Big Five mega-cap techs utterly dominated that massive
revenues growth. Their sales soared a truly-astounding 41.1% YoY
to $321b! That shouldn’t even be possible given their colossal
scales, but the stay-at-home trend coupled with raining stimmies
unleashed wildly-unprecedented demand. The rest of the SPX top 25
excluding those market-darling techs only saw their revenues climb
5.4% YoY to $599b.
Apple, Microsoft, Amazon, Alphabet, and Facebook have reported
strong sales growth for years on end, although nothing like this
extreme outlying Q1’21. At some point that has to slow dramatically
as demand stabilizes. Given their leviathan-scale sizes and heavy
weightings in virtually all stock portfolios, when the Big Five
sneeze the entire stock markets will catch a cold. The
concentration risk is stellar in these lofty markets!
With
Americans flush with new iPhones and iPads, will they feel the need
to upgrade again in the next few years? Can Microsoft keep
squeezing more subscription revenues out of software that we used
buy outright? Will Amazon’s sales keep soaring as people’s stimmies
dwindle and they have to start budgeting again? Will businesses
keep buying ads from Alphabet and Facebook as stimulus money wanes?
Make
no mistake, this crazy past year was an exceedingly-extreme
anomaly. The Fed has never printed trillions of new dollars before
in a single year, nor has the Treasury injected trillions of dollars
into people’s bank accounts. That deluge of new money baked into
the system is already spawning runaway inflation. This
central bank and federal government can’t risk unleashing
nation-slaying hyperinflation by keeping this up.
Reckonings always follow debt-financed spending binges. After
anything is done to excess, the delayed price must still be paid.
The colossal outsized demand fueled by extreme money printing over
this past year pulled much buying forward. Americans and
companies indulging in fulfilling wants and needs won’t have to buy
those same things again for years in cases of durable goods. That
is ominous for US stocks.
On
the hard-earnings front under Generally Accepted Accounting
Principles required by the SEC, Q1’21 also proved a blowout
quarter. The SPX top 25 collectively earned nearly $151b last
quarter, rocketing up a staggering 225% YoY! Yet that was still shy
of Q4’20’s $169b. And that phenomenal growth was greatly skewed by
a single company, which is Warren Buffett’s giant Berkshire Hathaway
conglomerate.
Berkshire is the biggest American company after the Big Five
mega-cap techs and millennial favorite electric-car maker Tesla. As
essentially an investment holding company, Berkshire is required to
flush unrealized gains and losses in its vast investments
through income statements every quarter. This makes Buffett’s blood
boil, he rails against it every chance he gets. Thus Berkshire’s
bottom line swings wildly.
Thanks to that lockdown-induced stock panic in Q1’20, the S&P 500
plummeted 20.0% that quarter! So Berkshire’s unrealized losses on
stock positions were so colossal that it reported a $50b loss.
In Q1’21, that swung to net income near $12b. There is no other
company with such crazy-volatile profits. So if we back out
Berkshire from both quarters, the rest of the SPX top 25 had $139b
of earnings which surged 44.6% YoY.
Again the incredibly-lucky right-place-right-time mega-cap techs
dominated these soaring profits. Their hard bottom-line accounting
earnings skyrocketed an unbelievable 105.7% YoY to nearly
$75b! Yet the rest of the SPX top 20 ex-Berkshire only earned $64b
which just grew a trifling 7.4% YoY. This is really important for
framing the entire S&P 500’s valuation, which overwhelmingly depends
on the Big Five techs.
Wall
Street strategists often discuss the earnings multiple of the entire
SPX. They’ll lump together all the profits for all 500 companies,
and compare them to this index’s current levels. That earnings
number is seeing big growth, lowering apparent market valuations.
But the better earnings certainly aren’t universal, they are
heavily concentrated in the mega-cap tech behemoths! Their
profits growth is masking broader weakness.
So
if demand for the products and services of Apple, Microsoft, Amazon,
Alphabet, and Facebook falters, their resulting earnings hits will
leave the entire stock markets way more overvalued. While
these elites commanding 21% of the entire S&P 500’s market cap is
already huge, their profits are a much-greater fraction of all SPX
companies’. So the Big Five’s concentration risks are way larger
than most traders realize.
In
addition to total profits, I also like to look at earnings-per-share
data to see how stock buybacks goosed reported profits. They leave
fewer shares to spread earnings across, resulting in higher
per-share numbers. Apple of course is the buyback king, pouring
tens of billions of dollars into actively manipulating both its
stock price and EPS higher. So while its total profits skyrocketed
110% YoY, EPS bested that up 120%!
Despite blockbuster overall revenues and earnings mostly-driven by
the Big Five techs, valuations for these Fed-levitated stock markets
remain deep into dangerous bubble territory. At the end of
Q1’21, the SPX top 25 averaged trailing-twelve-month
price-to-earnings ratios way up at 79.8x. That nearly tripled from
the end of Q1’20 after that stock panic! Thankfully that is skewed
way high by the new inclusion of Tesla.
Despite barely making any money, this electric-car manufacturer was
inducted into the S&P 500 late last year. It was a favorite stock
for millennial traders to pour their stimmies into, so its market
cap rocketed 531% higher between the ends of Q1’20 to Q1’21! That
radically dwarfed everything else in the SPX top 25. Tesla
enthusiasts apparently see a future where all this company’s profits
aren’t from regulatory credits.
Last
quarter 118% of Tesla’s GAAP earnings resulted from selling
regulatory credits! It continues to lose money actually making
cars, as has been the case for its entire history. Even with these
big government handouts subsidizing Tesla, it still exited Q1’21
trading at an absurd 1,040 times its latest-four-quarters’ reported
earnings! At this rate, it would take Tesla over 1,000 years to
earn back its current stock price!
Excluding Tesla’s ludicrous valuation, the rest of the SPX top 25
averaged TTM P/Es of 36.2x. That sounds way better, only up 34%
YoY. But it is still deep into bubble territory. Over the last
century and a half or so, stock-market valuations have averaged 14x
earnings which is fair value. Twice that at 28x is where the bubble
threshold begins. The Fed has absolutely inflated a monster
stock-market bubble.
All
bubbles end badly, in brutal secular bears forcing stock
prices to fall low enough for long enough to let earnings catch up.
Assuming the SPX top 25’s profits stayed at these extreme
Fed-money-printing-fueled levels, the SPX would have to plunge 63%
to 1,535 to hit fair value at 14x! And if earnings retreat when the
monetary backdrop stabilizes, that could be even lower. Stock
prices being cut in half isn’t even unusual.
The
S&P 500’s last two secular bears after extreme overvaluations ended
in October 2002 and March 2009. The SPX plummeted 49.1% over 2.6
years and 56.8% over 1.4 years during those necessary rebalancing
events, to drag stock prices back down to reasonably reflect
underlying corporate earnings! Most traders seem to assume
central-bank money printing can render bears extinct, or at least
delay them.
The
Fed has two choices. It can keep running the money pumps overtime,
blowing liquidity into the radically-overvalued US stock markets.
But that deluge of capital will eventually result in
hyper-inflation, destroying the US dollar’s value through extreme
dilution. Eventually terrible inflation hammers even the stock
markets. Or the Fed can slow, stop, or reverse the monetary excess,
bursting the stock bubble it spawned.
Letting a long-overdue bear market restore normal valuations to
stock markets would be far less harmful to Americans than extreme
inflation. But for years Fed officials have lacked the courage to
take their heavy feet off the monetary accelerator. Either way,
stock markets can’t stay deep into bubble territory forever. And
interestingly the all-important mega-cap techs are even more
overvalued than the rest of the SPX top 25.
At
the end of Q1’21, Apple, Microsoft, Amazon, Alphabet, and Facebook
averaged TTM P/Es of 40.7x. The next 20 largest US companies
ex-Tesla traded at 34.8x earnings. So even without falling profits
as spending normalizes post-stimmies, the Big Five are more
vulnerable to serious valuation-driven selloffs then the rest of the
stock markets. That’s why higher 10-year Treasury yields have
disproportionately hit techs.
While last quarter’s results were spectacular for the big US stocks,
their extreme overvaluations are a serious downside risk.
With Q1’21’s huge profits coming into the rolling-four-quarter
average used in price-to-earnings-ratio calculations, these
valuations have moderated some. But that is dependent on these epic
profits being sustainable, which just can’t happen as the money
printing and stimulus checks wane.
Again over the year ending Q1’21, the S&P 500 rocketed 53.7%
higher. But the majority of that was due to what Wall Street
euphemistically calls “multiple expansion”, which is stocks becoming
more expensive relative to underlying corporate earnings. With
SPX-top-25 average P/Es ex-Tesla up 34% YoY, that implies nearly
2/3rds of this past year’s massive stock-price gains weren’t
fundamentally justified at all.
While stock buybacks have soared as executives try to manipulate
their compensation higher, actually returning real cash to
shareholders via dividends slumped. These big US stocks’ total
dividends slipped 0.9% YoY to $34b despite their colossal earnings.
The Big Five techs’ grew 5.8% near $8b, while the next 20 largest US
companies’ dividends fell 2.6% to $26b. Corporate owners aren’t
sharing in this pandemic windfall.
The
SPX top 25 generated $165b in cashflows from operations last
quarter, which really lagged profits growth only surging 35.8% YoY.
That number excludes the mega-banks JPMorgan Chase and Bank of
America, as their operating cashflows are wildly volatile and not
comparable to non-bank companies. Operating cash flows growing
slower than earnings suggest cost cutting was a considerable
driver of the latter.
But
the costs corporations have to pay for goods, services, and
employees are surging dramatically. The Fed’s extreme money
printing is to blame, with vastly more dollars chasing and competing
for far-more-slowly-growing pools of things to spend them on. That
is bidding up the prices paid on everything, which means cost
cutting is finished. Now companies are raising prices to pass along
higher costs to customers.
Of
course higher costs cascading through global supply chains
strengthen the inflationary impulse fueling higher prices. That in
turn boosts inflation expectations among speculators and
investors, leading them to allocate capital differently. As
inflation erodes profit margins and total earnings since customers
can’t spend as much, stock markets look less attractive. So
investment portfolios are shifted into alternative assets.
That’s one reason bitcoin and leading cryptos have skyrocketed this
year, though they are in speculative manias now. Hard assets
including commodities are the traditional go-to destination during
times of big monetary inflation. Naturally
supply-growth-constrained gold leads that trade, surging on
soaring money supplies. The gold-mining stocks tend to leverage
their metal’s advances by 2x to 3x,
blasting way
higher.
That’s why we’ve been deploying our capital in high-potential
fundamentally-superior gold stocks and silver stocks in our
newsletters this year. As the Fed’s dire predicament and the
precarious state of these bubble-valued stock markets becomes more
apparent, speculators and investors alike will increasingly pour
into gold and its miners’ stocks. Their gains in the coming years
on this tidal wave of inflation will be massive.
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The
bottom line is despite reporting blowout Q1’21 results, the big US
stocks’ valuations remain deep in dangerous bubble territory. While
sales and profits soared, that growth was overwhelmingly
concentrated in the handful of mega-cap techs. And they benefitted
greatly from the colossal helicopter-money stimulus payments to
Americans. As stimmies dry up and spending returns to normal,
demand will greatly slow.
With
inflation already running away, neither the federal government nor
Fed can afford to keep injecting trillions of dollars into the US
economy for long. As that extreme pace of money printing slows, the
stock markets directly buoyed by it will have to deflate. And it’s
a long, long ways down for stock prices until they reasonably
reflect even Q1’s incredibly-strong corporate earnings. That’s very
bearish for stock markets. |