The
big US stocks dominating markets and investors’ portfolios continue
to thrive. They are finishing up another earnings season covering a
record-breaking quarter, reporting some fantastic results. Still
these fat underlying profits are growing far slower than major
companies’ soaring stock prices. That has forced valuations deeper
into dangerous bubble territory, fueling mounting risks for
awakening a new bear market.
Prevailing stock prices are mostly driven by herd psychology,
popular greed and fear. That often masks how companies are actually
faring fundamentally. But those obscuring sentiment fogs are
dispelled once a quarter when new results are released. Companies
listed on US stock exchanges have 40-calendar-day deadlines after
quarter-ends to file these reports with the US Securities and
Exchange Commission.
These comprehensive quarterlies include full financial statements,
and management’s discussion and analysis on them. MD&As are often
more valuable than financials, illuminating material developments
and sharing strategies to achieve future growth. These essential
quarterly reports offer the best-available fundamental data on
individual stocks, yielding excellent insights into how companies
are likely to perform.
By
the look of the stock markets, big US stocks must be crushing it.
In Q1’24 the flagship S&P 500 stock index dominated by these elite
companies blasted 10.2% higher in a powerful one-sided
advance. While the SPX achieved fully 22 new record closes last
quarter, those relentless gains stretched it to extremely-overbought
levels. By late March the S&P 500 had soared 14.1% above its
baseline 200-day moving average!
Q1’s
strong surge naturally fueled serious greed and euphoria, a warning
sign flagging major toppings. Couple hyper-bullish popular
sentiment with extreme overboughtness and bubble valuations, and
stock investors ought to be wary. That includes all Americans
with retirement accounts, which are heavily invested in big US
stocks! With the SPX mostly grinding lower since Q1 ended, the
reckoning may be underway.
As
always big US stocks’ latest Q1’24 results are important for gaming
stock markets’ likely direction in coming months. For 27 quarters
in a row now, I’ve analyzed how the 25 largest US companies that
dominate the SPX fared in their latest earnings seasons. Exiting
Q1, these behemoths commanded a stunning record 46.8% of the
SPX’s total market cap! 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 Q1’23. These
symbols are followed by their stocks’ Q1’24 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, long 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 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 Q1’24 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.
Collectively these latest quarterly results from the leading US
companies shed light on crucial questions. Are the US stock markets
still fundamentally-sound enough to keep rallying on balance, or are
they threatened with a major selloff? If the latter, is it likely
to be a correction or new bear market?
The
US stock markets have grown increasingly top-heavy, which is a
serious risk. Exiting Q1, the SPX’s 25 largest component stocks
again represented 46.8% of its entire weighting! Dramatically
soaring since the 34.8% in Q3’17 when I launched this deep quarterly
research thread, that extreme concentration is troubling.
The fewer stocks any bull market depends on to drive it, the more
fragile and precarious it is.
These US stock markets are heavily reliant on the beloved
Magnificent 7 mega-cap technology stocks. Together mighty
Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta Platforms, and
Tesla now account for a staggering 29.1% of the SPX’s total
market cap! The Mag7’s gargantuan total $13,587b exceeded the total
of the SPX’s bottom 403 components. These market darlings
essentially are the US stock markets.
Their outperformance remains dramatic, with the Mag7’s market cap
skyrocketing 50.6% over the year ending Q1’24! That almost
doubled the entire S&P 500’s 27.9% gain, which means the vast
majority of its other 493 stocks seriously underperformed. While
these mega-cap-tech giants are fantastic American companies with
amazing fundamentals, their stocks are still exceedingly overvalued
as we will soon discuss.
So
another dynamic is fueling their outsized gains, and disturbingly
it is peer pressure. Since the lion’s share of US-stock-market
gains have come from the Mag7, professional fund managers have no
choice but to way-overweight their allocations. Without heavy Mag7
exposure, their funds’ performances will lag well behind their
peers’. Underperforming too long in the money-management business
is the kiss of death.
Investors naturally want the biggest gains, and shift their capital
to funds achieving them. Pulling money from lagging funds can
quickly strangle and even slay them, so fund managers have crowded
into these Mag7 market darlings. The financial media led by CNBC
champions this concentrated mega-cap-tech focus all day everyday,
creating a groupthink echo chamber. Funds not dominated by Mag7
stocks are rare.
While more capital flooding into fewer stocks has always ended badly
historically, the Mag7 once again reported spectacular quarterly
results. That makes fund managers’ consuming obsession with
mega-cap techs seem more righteous. The phenomenal success achieved
by Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla has
increasingly bifurcated stock markets. The Mag7 are in a league of
their own.
Despite their colossal size and scale, the Mag7’s total revenues
surged 13.3% YoY in Q1’24 to $456.3b. Leading the way was
NVIDIA riding that AI boom, its sales skyrocketing a jaw-dropping
265.3%! But cracks are spreading even among these elite market
darlings. Both Apple and Tesla suffered falling sales last quarter,
down 4.3% and 8.7% YoY respectively. These mega-cap techs fully
depend on consumer demand.
Recent years’
raging inflation has really pinched Americans’ budgets. While
headline inflation rates have moderated considerably, prices remain
way higher than pre-Biden-Administration levels. Forced to spend
much more on life’s necessities including food, energy, shelter, and
insurance, people have much less discretionary income left to
splurge on pocket computers and battery cars. Apple and Tesla are
feeling this.
Apple actually breaks out quarterly revenues into geographic
segments. In the Americas those slumped 1.4% YoY in Q1, reflecting
softening iPhone demand. But Greater China’s sales plunging
8.1% YoY was a bigger problem for Apple. China’s ruling Communist
Party is whipping up anti-American sentiment, encouraging the
Chinese people to buy smartphones from Chinese companies including
Huawei and Vivo.
But
even if Americans had money to burn, their iPhone upgrade cycle is
lengthening considerably. New models have marginal improvements,
but existing ones continue to run everything fast for several years
or more. Social incentives to upgrade are waning too, as all
iPhones essentially look the same. People can’t really tell which
models their friends are using, so there’s little prestige in
pulling out the latest version.
Apple’s growth years may be over, arguing its stock needs a
much-lower valuation. Q1’24 isn’t the first quarter sales dropped.
While they edged up 2.1% YoY in Q4’23 on the iPhone 15 launch, they
had fallen for four consecutive quarters leading into that!
Interestingly when releasing Q1’24 results, Apple tried to distract
investors from its weakening fundamentals by announcing a record
$110b stock-buyback campaign.
Tesla’s problems are much worse, since its cars are way more
expensive. Not only can fewer Americans afford to buy Teslas, but
electric-car enthusiasts already own them. The vast majority of car
buyers are not interested in electrics for a variety of reasons. So
Tesla is trying to sell EVs into a narrow saturated market. Also
Tesla owners skew liberal politically, and aren’t happy with Elon
Musk’s pro-free-speech stance.
Rather unusually, the next-18-largest US stocks after the Mag7
nearly matched the mega-cap techs’ huge revenues growth. The
former’s sales surging 11.4% YoY rivaled the latter’s 13.3%! But
that was simply caused by composition changes in the SPX top 25.
Bigger companies climbed into these elite ranks over this past year,
pushing out smaller ones. Costco and Bank of America displaced
Coca-Cola and PepsiCo.
A
year ago in Q1’23, COST and BAC were the 28th and 26th biggest US
stocks combining for $81.5b in sales. While KO and PEP ranked as
21st and 24th then, they only sold $28.8b worth of sugar water.
Without these composition changes alone, next-18-largest sales
growth in Q1’24 would’ve been closer to flat. So outside of the
Mag7 juggernaut, big US companies certainly aren’t faring as well on
the revenues front.
That
massive bifurcation between the mega-cap techs and everything else
was even more apparent in bottom-line earnings last quarter. The
Mag7’s GAAP profits rocketed a shocking 50.0% YoY to $105.5b,
while the next-18-biggest US stocks’ plunged 23.5% to $81.4b! While
Amazon’s 228.8%-YoY profits growth was amazing, NVIDIA’s monster
768.8% YoY jump to $12.3b was incredible but not sustainable.
NVDA
of course is the poster child for artificial intelligence. Its
graphics processing chips designed for gaming have been modified to
excel in AI tasks, specifically large language models and generative
AI. So demand for NVIDIA’s flagship H100 GPUs has skyrocketed,
particularly from deep-pocketed hyperscalers like Microsoft,
Alphabet, and Amazon rushing to build out cloud AI infrastructure as
fast as they can.
But
NVDA’s gravy days won’t last. Its AI chips are essentially upscaled
from high-end consumer-PC-gaming GPUs. Like Apple NVIDIA doesn’t
produce these itself, but contracts manufacturing out to Taiwan
Semiconductor. Late last year, Wall Street analysts estimated it
cost NVIDIA $3k to $4k each to make H100s, but they could be sold
for $25k to $40k! Extreme margins never last long, attracting
fierce competition.
Other chipmakers and even the hyperscalers themselves are rushing to
design their own AI chips to excel in AI’s enormous parallel
processing. Even if they aren’t as cutting-edge as NVIDIA’s GPUs,
they will be fast enough and far cheaper eroding NVDA’s market
share. So future NVIDIA GPUs won’t be able to command such crazy
gold-rush margins. With LLMs difficult to monetize, the whole AI
frenzy is also cooling.
Interestingly the next-18-biggest US stocks’ ugly 23.5%-YoY earnings
drop last quarter isn’t righteous. Accounting rules force Warren
Buffett’s gigantic Berkshire Hathaway investment conglomerate to
flush unrealized gains and losses from its vast holdings through its
income statement each quarter. Buffett himself hates this and often
rails against it, since it results in vast artificial volatility in
Berkshire’s profits.
In
Q1’24 Berkshire’s bottom-line earnings included $1.9b of investment
gains, but a year earlier in Q1’23 those ran a mind-boggling
$34.8b! Adjust those out of both quarters, and the next-18-biggest
US stocks’ Q1’24 GAAP earnings actually surged a surprising 10.9%
YoY! Big pharma were major contributors, with Eli Lilly, Merck, and
AbbVie seeing earnings rocket 66.8%, 68.8%, and 472.8% YoY on
soaring drug demand!
Leading the way is the GLP-1 agonist drugs for diabetes and weight
loss. Eli Lilly’s versions of those are Mounjaro and Zepbound.
Sales of the former last quarter hit $1.8b, more than tripling from
under $0.6b a year earlier! Q1 sales of the latter which was just
approved in November 2023 soared from zero to $0.5b. So people are
scrambling for this new class of hormone-suppressing drugs, despite
no long-term studies on them.
Maybe GLP-1s will ultimately prove fairly-safe, and demand will
continue growing. But maybe the risks will eventually outweigh the
benefits. These drugs are very expensive and require ongoing
injections, or most of the lost weight soon returns. Doctors also
recommend they be used in conjunction with diet and exercise, which
people generally aren’t very successful with. So the jury is out on
whether this is another fad.
Even
if drug demand remains robust, the SPX-top-25 big-pharma companies
are relatively small sporting crazy valuations. Exiting last
quarter, LLY, MRK, and ABBV had extreme trailing-twelve-month
price-to-earnings ratios of 133.4x, 879.7x, and 66.9x! Nothing else
came close except NVIDIA trading at 75.9x and Amazon at 62.2x. So
even if big-pharma profits keep surging, they won’t move the overall
needle much.
Valuations are the major problem
with these lofty stock markets, a very-serious one. The Mag7
averaged TTM P/Es of 43.2x exiting Q1, while the next-18-biggest US
stocks averaged a scary 82.2x! Historically 28x is where formal
stock-market bubbles start, which is twice the century-and-a-half
14x fair value for US stock markets. Those beloved mega-cap techs
are deep into bubble territory, despite their great fundamentals.
Extreme overvaluations are dangerous because they always inevitably
mean revert then overshoot in the opposite direction. Bear markets
exist to maul stock markets sideways to lower long enough for
earnings to catch up with too-high stock prices. Bubble valuations
can persist for some time while popular greed reigns, but not
forever. And it’s not just the mega-cap techs that are overdue for
a serious reckoning selloff.
Even
excluding those big-pharma outliers, the rest of the next-18-biggest
US stocks still averaged near-bubble 26.6x P/Es at the end of Q1.
The entire US stock markets are dangerously overvalued, with all 500
SPX stocks averaging 31.0x TTM P/Es leaving Q1! That is
understated too, as our spreadsheet we use to track those caps
individual P/Es at 100x to minimize outlier distortions. The
implications of this are ugly.
Despite their surging revenues, massive earnings, huge stock
buybacks, big dividends, and strong cash flows generated from
operations, the big US stocks are wildly overvalued. And if
the US economy rolls over into a recession as strapped Americans
pull in their horns, overvaluations will worsen. Lower sales will
be leveraged by plunging profits, forcing valuations even higher.
That increases the odds for a major bear.
Unfortunately during euphoric bubble toppings, complacent investors
forget how dangerous bears are. Extreme valuations spawned a couple
big ones in the early 2000s. The mighty flagship S&P 500 itself
plunged 49.1% over 30.5 months from March 2000 to October 2002, and
later plummeted 56.8% in 17.0 months from October 2007 to March
2009! Major bears off bubbles can easily cut stock prices in
half.
Even
lesser bears are no picnic. The last minor one saw the SPX mauled
25.4% lower from early January 2022 to mid-October 2022. And
contrary to Wall Street assertions that fundamentally-strong
mega-cap-tech stocks are resistant to falling markets, the Mag7
performed far worse. Surrounding that SPX-bear span, the beloved
Mag7 stocks themselves averaged brutal 54.6% losses more than
doubling the SPX’s!
So
despite the big US stocks’ mostly-fantastic Q1’24 results, investors
need to stay wary of their extreme overvaluations. This euphoric
stock bubble could pop anytime, ushering in a major selloff with
high odds of exceeding the 20% new-bear threshold. Investors can
prepare by ratcheting up trailing stop losses, and diversifying any
excessive exposure out of Mag7 stocks. That capital should be moved
into non-tech sectors.
That
includes allocating some capital to counter-moving gold and
its miners’ stocks. Despite American investors wanting nothing to
do with gold like usual during euphoric stock bubbles, it has
surged to many new record highs in a
remarkable
breakout. Fueled by very-strong Chinese investment demand and
central-bank buying, this powerful gold upleg has already blasted up
31.2% in 6.4 months and isn’t over yet!
Since Q1 ended, these bubble-valued US stock markets have started
rolling over. Sooner or later that will rekindle American gold
demand, supercharging gold’s upleg. More record highs will
generate more bullish financial-media coverage, increasingly
attracting in capital. American stock investors’ total gold
allocation now is around 0.2%, effectively zero! They have vast
room to buy to rebalance to historic norms.
The
gold miners’ stocks are the biggest beneficiaries of higher gold,
with their earnings and stock prices
really amplifying
its gains. While gold stocks are increasingly rallying with
gold, they remain way out of favor and deeply undervalued. Our
newsletter trading books are currently full of
fundamentally-superior
smaller mid-tier
and junior gold-mining stocks that could easily double or
triple from here as gold’s upleg matures!
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The
bottom line is big US stocks just reported another great quarter.
Led by the beloved mega-cap techs, revenues and earnings utterly
soared. But despite that, valuations still remain deep in dangerous
bubble territory. The US stock markets are wildly overpriced
compared to underlying corporate earnings, which portends a serious
bear looming. It will maul markets, forcing stock prices lower
until profits catch up.
Despite their fantastic fundamentals, the Mag7 offer no refuge in
stock bears. Through the last minor one, these elite stocks
averaged terrible 55% losses more than doubling the S&P 500’s. The
more overvalued stocks entering bears, the worse they fare in them.
But still-undervalued gold stocks will thrive, soaring in a massive
mean reversion as gold’s powerful upleg grows. Investors need to
diversify into gold stocks. |