The
fundamentals of the big US stocks dominating the major indices are
more important than ever. The US stock markets increasingly look to
be rolling over into a new bear on extreme Fed tightening. How the
leaders are faring will help determine whether or not that fearsome
beast is really awakening from a long hibernation. The
just-finishing Q1’22 earnings season reveals how the largest US
companies are doing.
The
mighty S&P 500 (SPX) is the flagship benchmark US stock index. Not
only is it closely watched by nearly all traders, its large
component stocks are heavily-owned by the vast majority of
investors. The huge SPY SPDR S&P 500, IVV iShares Core S&P 500, and
VOO Vanguard S&P 500 exchange-traded funds are the biggest in the
world by far, with staggering assets this week of $385.7b, $304.4b,
and $258.2b!
The
SPX enjoyed a blowout 2021, powering up to new all-time closing
highs on fully 27% of all last year’s trading days! But after one
final record close at 4,797 on this year’s opening trading day, 2022
is looking way different. Just a couple days later, heavy selling
ignited on the mid-December Federal Open Market Committee meeting’s
minutes. There top Fed officials had started discussing
quantitative-tightening bond selling.
QT
is a serious threat to stock markets levitated for years by extreme
Fed money printing via quantitative easing. By mid-April that had
mushroomed to an absurd $4,806.9b in just 25.5 months! The Fed’s
balance sheet had skyrocketed 115.6% since March 2020’s
pandemic-lockdown stock panic, effectively more than doubling
the US money supply! The SPX’s 114.4% gain at best in that span
mirrored monetary growth.
The
last time the Fed attempted QT and rate hikes in 2018, the SPX
plummeted 19.8% in 3.1 months into late December! That near-bear
approach frightened top Fed officials into
caving,
prematurely killing both QT bond selling and rate hikes. But
traders haven’t forgotten that severe market thrashing, which is why
the SPX has been carving lower highs and lower lows this year
as extreme-Fed-tightening jawboning mounted.
At
worst in late April, the long-impervious S&P 500 had already
crumbled 13.9% in just 3.8 months! This is already the worst
selloff since March 2020’s stock panic, dropping ever closer to the
-20% formal new-bear threshold. Recent months’ price action sure
looks bear-like, a distinct downtrend well-defined by both
declining upper-resistance and lower-support lines. Downlegs are
followed by fierce short-covering rallies.
With
a young bear probably underway but not yet confirmed, the big US
stocks’ latest quarterly results are exceedingly-important. If
these universally-held stalwart market generals have already been
pounded to fundamentally-cheap levels, odds are higher a bear market
can be averted. But if they remain expensive from that epic deluge
of QE4 money
printing, much-greater downside from a severe bear mauling is
likely.
For
19 quarters in a row now, I’ve analyzed how the 25-largest US
companies dominating the SPX fared in their latest earnings
season. As the just-reported Q1’22 ended, these behemoths alone
accounted for a heavily-concentrated 43.6% of the entire S&P 500’s
weighting! The highest on record since I started this deep-research
thread, the stock-market outlook is mostly-dependent on the big US
stocks’ fortunes.
US
companies have 40 days after quarter-ends to file comprehensive 10-Q
quarterly reports with the US Securities and Exchange Commission.
As of the middle of this week, 34 days had passed since that last
quarter wound down. While the SPX plunged as much as 13.0% within
Q1, a sharp bear-market-rally-like surge left if down just 4.9% in
Q1 proper. This table below shows some key highlights from that
quarter’s 10-Qs.
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 Q1’21. These
symbols are followed by their stocks’ Q1’22 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 in recent years, fueled by the Fed’s
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, which maximizes 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 Q1’22 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 these lofty US stock markets
are fundamentally-sound in the face of very-bearish aggressive Fed
rate hikes and QT bond selling.
These 25-largest US stocks dominating the American stock markets are
all fantastic companies with great businesses. There’s no other way
they could grow so massive. But being awesome doesn’t mean their
underlying fundamentals justify their stock prices. Valuations
are ignored in late-stage bulls as euphoric momentum-chasing buying
reigns. But how expensive stocks are fuels bears, driving their
sizes and durations.
Again commanding a staggering 43.6% of the SPX’s entire market cap
as Q1’22 wound down, these elite stocks effectively are the US
markets! The concentration risk is even worse than that
indicates, since the top-5 beloved mega-cap tech stocks alone
account for 24.0% of the SPX! Exiting last quarter they were
mostly-usual market-darling suspects Apple, Microsoft, Alphabet,
Amazon, and Tesla. Meta dropped to 8th!
While that former Facebook has been crushed this year, it still has
far more in common with the top-4 US stocks than that leading
electric-car manufacturer. For years I’ve broken out the top 5
separately, which long included AAPL, MSFT, GOOGL, AMZN, and FB.
I’m going to keep that traditional mega-cap-tech grouping today,
even though Meta has fallen from grace. So FB is still considered
top-5 and TSLA bottom-20.
The
collective market caps of these 25-largest US stocks blasted 24.0%
higher year-over-year between the ends of Q1’21 to Q1’22 to
$18,046.6b! That trounced the overall SPX, which saw
much-more-modest 14.0% gains. That reflects institutional investors
increasingly crowding into the biggest US companies, simply because
their stocks have enjoyed the best returns. That spawns virtuous
circles of huge capital inflows.
Overall revenues at the SPX top 25 last quarter soared a phenomenal
13.1% YoY to $1,041.4b! That’s amazing growth at the vast scales
these giants operate at, and a major new all-time-record high. But
with inflation raging thanks to the Fed’s extreme QE4 money
printing, bigger sales dollars also reflect surging general-price
levels. The latest Consumer Price Index inflation print in
March rocketed up a scary 8.5% YoY!
For
years big US stocks’ overall revenue growth was disproportionally
won by those top-5 mega-cap techs. But interestingly that wasn’t
the case in Q1, despite them enjoying excellent 11.7%-YoY sales
increases to $359.0b. Surprisingly the next-20-largest SPX stocks
bettered that, reporting sales climbing a larger 13.9% YoY to
$682.4b! Inflation or not, that implies the largest American
companies are faring great.
Unfortunately that is misleading, resulting from major
composition changes among the SPX top 25 rather than actual
results. Normally the rankings among these elite companies don’t
change much, but this past year has been an extraordinary
exception. Chevron, Pfizer, AbbVie, Eli Lilly, and Broadcom all
charged up by double-digit rankings changes to achieve
biggest-US-company status! That is incredibly-unusual.
Since the S&P 500 is weighted by components’ market capitalizations,
that means these newer stocks enjoyed bigger rallies over this past
year displacing struggling ones. A couple high-profile examples are
PayPal and Netflix, which plummeted from 19th and 25th in the
comparable Q1’21 to 61st and 49th in this recently-finished Q1’22!
These market-darlings’ smaller sales and profits never justified
huge market caps.
Last
quarter, this pair of falling-from-favor companies merely reported
collective revenues and earnings of $14.4b and $2.1b. Meanwhile the
two companies that replaced them in the SPX top 25 dwarfed that,
with an enormous $80.0b and $14.1b in Q1 sales and profits! Oil
super-major Chevron accounted for most of that, with revenues and
earnings skyrocketing 75.0% and 354.5% YoY on much-higher
crude-oil prices.
In
US terms quarterly-average oil prices soared 63.4% YoY to $94.98,
resulting in a huge windfall for the big oil companies! Exxon Mobil
also contributed to surging SPX-top-25 sales with massive 48.3%-YoY
growth. After Chevron the next-largest new company in these elite
ranks is Pfizer. Selling those mRNA COVID-19 injections has been
gangbusters business, as PFE’s sales and profits soared 76.0% and
61.2% YoY!
So
had Chevron and Pfizer alone not replaced PayPal and Netflix,
overall SPX-top-25 revenues would have been $65.7b lower in Q1’22.
The big US stocks’ sales aren’t as great as they look, much of their
big growth is composition changes. Naturally the same is true on
the hard-earnings front under Generally Accepted Accounting
Principles. Overall SPX-top-25 accounting profits actually
slumped 2.4% YoY to $146.8b!
Ominously that’s the first time aggregate profits of the biggest US
companies fell since Q2’20, which was the dark heart of pandemic
lockdowns. Lower profits absolutely are even more stunning
considering all this red-hot inflation driving up price levels.
Shockingly all those declines came from those elite top-5 mega-cap
techs, which saw earnings implode 17.2% YoY to $61.8b! Even their
fantastic businesses are flagging.
Not
Apple and Microsoft, which still enjoyed good 5.8% and 8.2%-YoY
profits growth. But earnings fell 8.3% and 21.4% YoY at Alphabet
and Meta, while Amazon’s plummeted from an $8.1b profit in Q1’21 to
a $3.8b loss in Q1’22! Long considered fortress stocks immune from
worries, AMZN stock crashed a brutal 14.0% the day after it reported
Q1 results! Q2 sales guidance was 5.2% below Wall Street estimates.
The
next-20-largest SPX stocks including Tesla saw earnings soar 12.2%
YoY last quarter to $85.0b! Elon Musk’s cult-favorite electric-car
maker contributed, with profits skyrocketing 615.1% YoY to $3.3b.
But those far-higher corporate earnings were overwhelmingly driven
by composition changes, with just CVX and PFE reporting $12.0b more
in Q1 profits than the knocked-out-of-these-rankings PYPL and NFLX.
Had
those displacements alone not happened, overall SPX-top-25 earnings
would’ve fallen 10.4% YoY. Raging inflation is very corrosive to
corporate profits. Companies can’t pass along all their higher
input costs to customers, as raising selling prices big-and-fast
would drive away plenty. But even modest price hikes erode sales as
some customers look for substitutes, or choose to do without.
Weaker earnings are likely.
But
big US companies’ managements aren’t battening down the hatches
preparing for the Fed’s inflation tsunami to slow their businesses
considerably. Instead they continued buying back their stocks
like there is no tomorrow, maximizing their personal compensation.
Total stock buybacks across these SPX-top-25 companies in Q1’22
soared a mind-boggling 35.1% YoY to $95.0b! Those mega-cap techs
accounted for 6/10ths!
Pouring shareholders’ cash at these vast levels into manipulating
stock prices higher isn’t sustainable. Mighty Apple has built the
biggest business the world has ever seen around ubiquitous pocket
computers. But even it can’t afford the $22.6b and $3.6b it plowed
into stock buybacks and dividends last quarter. Together those
added up to 104.9% of quarterly earnings. Meta’s buybacks were
127.3% of its Q1’22 profits!
It
wasn’t just the mega-cap techs spending more on stock buybacks and
dividends than their businesses generated in GAAP-profits
terms. Walmart, Home Depot, Eli Lilly, and Broadcom spent 110.7%,
183.6%, 125.4%, and 187.2% of their quarterly profits on “returning
cash to shareholders”! Dividends actually do that, but stock
buybacks are ultimately wasteful and manipulative. They aren’t a
productive use of scarce capital.
Our
quarterly-earnings spreadsheet includes much more data than I can
fit into these tables, including the cash positions of these big US
stocks. Their overall cash treasuries plunged 14.5% YoY to
$745.9b in Q1’22, with similar declines among both the top-5 and
next-20 largest! With inflation cutting into profits, these elite
US companies can’t afford to burn big cash for long to fund outsized
stock buybacks and pay dividends.
Since cash dividends are so important to investors, companies will
slash their much-larger repurchases long before quarterly direct
payments. Total dividends among these SPX-top-25 companies grew a
way-slower 12.6% YoY to a much-smaller $38.1b. Overall stock
buybacks dwarfed that, again up 35.1% YoY to $95.0b. So buying back
their own stocks will come to the chopping block as corporate
profits and cash wane.
The
Fed’s new accelerated rate-hike cycle will also have a serious
dampening effect on recent years’ stock-buyback mania. Since many
elite companies were plowing more money into manipulating stock
prices than their earnings could support, they borrowed money for
buybacks. But with the Fed’s zero-interest-rate policy dead and
borrowing costs surging, debt-financing repurchases will get
way-more expensive.
Ominously the single-largest source of overall stock demand
for years now has been stock buybacks! So if companies are forced
to pare those back due to inflation eroding profits and higher
interest rates, that is very-bearish for US stock markets. Lower
buybacks going forward greatly increase the odds a new bear is
indeed underway. Weaker share demand from companies as share
supplies rise from selling is a dire omen.
The
SPX top 25’s operating-cashflow generation also reflects slowing
businesses despite those major composition changes in these
elite ranks. Excluding the giant money-center banks JPMorgan Chase
and Bank of America which have wild cashflow volatility, the rest of
the big US stocks saw their overall OCFs slump 1.7% lower YoY to
$162.1b. And that is also skewed high by CVX and PFE replacing PYPL
and NFLX.
With
both accounting earnings and operating cashflows declining last
quarter, by considerably more than the totals suggest due to
composition changes, the US economy is apparently slowing.
The initial read on US Q1 GDP confirmed what corporate profits are
signaling, which surprised last week revealing 1.4% annualized
shrinkage compared to a +1.0% consensus forecast! Inflation is
already retarding spending.
That
certainly makes sense. With the costs of necessities surging
dramatically, well into the double-digit percentages regardless of
what lowballed CPI inflation claims, Americans have less
discretionary income to purchase the goods and services the
biggest US companies are selling. While we all have to buy food,
energy, and gasoline regardless of how expensive, we don’t have to
buy any of the stuff sold on Amazon.
The
Fed’s raging inflation undermining the US dollar’s purchasing power
will have far-reaching impacts on corporate sales and profits.
People will likely run their iPhones longer before upgrading, and
probably won’t buy as many luxury electric cars and discrete
computer-graphics cards. Home-improvement projects and Disney
vacations will be harder to budget for. And big US stocks’ revenues
and earnings will suffer.
A
likely-serious economic slowdown has huge implications for
valuations, how expensive stock prices are relative to their
underlying corporate earnings. And at the end of Q1’22, well
before that quarter’s results were subsequently released and
included in trailing-twelve-month price-to-earnings ratios, big US
stocks’ valuations remained deep into dangerous bubble territory.
The SPX top 25 averaged lofty 38.4x TTM P/Es!
Wildly that was a huge improvement, plunging 51.9% YoY from Q1’21’s
scary 79.8x. But that was mostly from Tesla, which saw its P/E
collapse 78.6% YoY to a still-ridiculous 222.9x as March ended.
Ex-Tesla since it is such an extreme outlier, the rest of the
SPX-top-25 stocks saw their average TTM P/Es retreat 15.2% YoY to
30.7x in Q1’22. That still exceeds the historical bubble
threshold of 28x, which spells big trouble.
Bear
markets exist solely to maul stock prices sideways-to-lower for long
enough for underlying earnings to catch up. Stock valuations
are bid to unsustainable extremes in late-stage bull markets,
necessitating subsequent bears to rebalance and normalize stock
prices relative to profits. Bears usually ignite with stock-market
valuations more than double their century-and-a-half average
fair-value running 14x earnings.
That’s certainly the case today, after US stocks traded at lofty
bubble valuations for years as the Fed’s extreme money printing
directly levitated them. Then once awakened, bears don’t tend to
lumber back into hibernation until general valuations are back down
under fair-value. Even if earnings stay steady and defy inflation’s
corrosion, the SPX would have to collapse 54.4% from early
January’s peak to 2,189 to hit 14x!
That
sounds crazy after long years of artificially-elevated stock prices
thanks to extreme Fed easing, but it isn’t unusual. The last couple
major valuation-driven bears ending in October 2002 and March 2009
saw the SPX mauled 49.1% and 56.8% lower over 2.6 and 1.4
years! Bear markets are nothing to be trifled with, and the odds
the next major one is underway are certainly mounting given SPX
technicals and fundamentals.
So
with bubble valuations festering as the Fed both aggressively hikes
rates and ramps up QT monetary destruction to never-before-attempted
levels, what should investors do? Stay wary, avoid getting lulled
into complacency by sharp bear-market-rally-like surges. Ratchet-up
your stop losses to lock in more of your gains. And greatly up your
portfolio allocation in counter-moving gold, which flourishes in
bears and inflation.
During the last
similar inflation super-spikes in the 1970s, gold prices
nearly tripled during the first and more than quadrupled in the
second! Gold also
thrived during
past Fed-rate-hike cycles, which are very bearish for stock
markets. Gold and its miners’ stocks, which really amplify their
metal’s gains,
are still running despite a sharp recent pullback. They will
soar as gold powers higher on
surging
investment demand.
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The
bottom line is the big US stocks’ latest quarterly results
exacerbated the risks a young bear market is awakening. Despite
record sales partially fueled by the Fed’s raging inflation, both
accounting profits and operating cashflows still slumped. Higher
input costs are already eroding margins, eating into earnings.
That’s a big problem with valuations still remaining way up in
dangerous bubble territory before Q1’22 results.
And
the Fed panicking to slay its inflation monster promises much more
fundamental pain for big US stocks. The most-aggressive rate hikes
in decades combined with the fastest QT monetary destruction ever
dared is incredibly-bearish for corporate earnings and recent years’
stock-buyback mania. With stocks still bubble-valued heading into
this dreadful mess, staving off a long-Fed-starved bear seems
impossible. |