The
bleeding US stock markets are mired in a mounting bear fueled by
extreme Fed tightening, already losing over a quarter of their value
this year! Traders are wondering how long this rampaging bear will
keep mauling stocks, and how severe the damage will be. This bear’s
ultimate trajectory is partially dependent on how the gigantic
American companies dominating major stock indices are faring
fundamentally.
They
are just wrapping up their Q3’22 earnings season, covering a
challenging quarter for stock markets. The mighty S&P 500 (SPX)
flagship benchmark US stock index fell a sizable 5.3% last quarter,
exiting at a fresh bear low. This rather-aggressive beast had
clawed the SPX down a serious 25.2% in just 8.9 months! But
bears can grow a heck of a lot bigger and prowl for way longer, so
this one still looks like a cub.
This
is especially true of fundamentally-driven bears, that arise and
exist to slash rampant overvaluations back down near historical
norms. From March 2000 to October 2002, the SPX cratered 49.1% over
30.5 months. Later between October 2007 to March 2009, the SPX
again plummeted 56.8% in 17.0 months! These dreadful ursa majors
are nothing to be trifled with, mercilessly shredding away long
years of gains.
Ominously today’s underlying economic conditions impacting corporate
profitability are much worse than during those last bears. Monthly
headline US Consumer Price Index inflation averaged 2.6%
year-over-year increases during the early-2000s bear and 3.2% during
that late-2000s one. But today’s young bear is seeing raging
inflation, with the CPI averaging huge 8.3% YoY jumps gutting
corporate earnings power!
The
Fed was also far less hostile to stock markets during those
prior great bears. Entering the earlier one, the federal-funds rate
was running 6.0% before 50 basis points of hikes peaking at 6.5%.
After that the Federal Open Market Committee frantically slashed its
FFR way down to 1.75% by the end of that bear! Top Fed officials
proved even way more dovish than that during that later bigger,
meaner bear market.
As
it stealthily awakened from hibernation, the FFR was running 4.75%.
But the Fed panicked the deeper that bear mauled, slamming the
federal-funds rate all the way down to 0.125% before that bear gave
up its ghost! That was a zero-interest-rate policy, as the FOMC
targets a quarter-point range for its interest rate. Those previous
couple big bears suffered massive losses despite benign inflation
and a dovish Fed.
But
today’s is a radically-different story. Since mid-March 2022 alone,
the FOMC has hiked the FFR an extreme 375bp from 0.125% to
3.875%! And just last week the Fed chair himself warned that rate
hikes still “have a ways to go” to ultimate levels “higher than
previously expected”. On top of these blisteringly-fast rate hikes,
the FOMC is also actively destroying money through
quantitative-tightening bond selling.
Neither previous bear had any QT, a roaring liquidity headwind for
stock markets! QT2 is critical now because today’s raging inflation
was directly fueled by extreme Fed money printing. In just 25.5
months into mid-April 2022, the Fed ballooned its balance sheet an
absurd 115.6% or $4,807b monetizing bonds! More than doubling
the US-dollar monetary base in just a couple years is why inflation
is out of control.
Since June alone, QT2 has been ramped up to nearly double the
terminal size of QT1 in only a quarter the time! At $95b per
month of monetary destruction, QT2 would have to run for another 48
months to unwind the Fed’s post-pandemic-lockdown-stock-panic money
spewing. Today’s stock bear growing during extreme Fed rate hikes
and extreme QT is utterly unprecedented, making it far more
dangerous.
So
how big US companies are actually faring operationally is very
important, offering clues as to whether this young bear will likely
deepen. For 21 quarters in a row now, I’ve analyzed how the
25-largest US companies dominating the SPX did in their latest
earnings season. As Q3 ended, these behemoths alone accounted for a
heavily-concentrated 42.4% of the entire S&P 500’s weighting! They
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 Q3’21. These
symbols are followed by their stocks’ Q3’22 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
late 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 Q3’22 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 the US stock markets are
fundamentally sound enough to stave off this young bear before it
grows into a ravenous monster.
Bear
markets don’t discriminate, eagerly mauling down even the best
companies. And there’s no doubt these 25-largest American stocks
dominating the US markets are all fantastic businesses. They
couldn’t have grown so massive if they weren’t offering outstanding
goods and services their customers want to buy. Nevertheless, these
elite blue-chip industry leaders haven’t been spared this bear’s
bloody claws.
Together their collective market capitalization dropped 16.7% YoY
exiting Q3’22, mirroring the overall SPX’s 16.8% decline in that
span. And surprisingly the market-darling mega-cap technology
stocks led the way, Apple, Microsoft, Alphabet, Amazon, and Meta.
For long years they were the five biggest SPX stocks. Although
Meta’s stunning fall from grace has gutted its market cap, it
remains a mega-cap tech.
Over
this past year ending Q3’22, these five mega-cap techs saw their
total market caps collapse 23.0%! Meanwhile the next-20-largest US
companies only suffered a collective 9.5% market-cap decline. The
beloved market generals are increasingly being shot, a dire omen for
stock markets’ fortunes. Since bears exist to maul down
overvaluations, their predations are the worst in expensive
stocks like mega-cap techs.
Amazingly given the Fed’s raging inflation, these 25 biggest US
companies still managed to grow their total revenues by a massive
20.2% YoY in Q3’22 to $1,133b! Seeming to again show why they are
the best, that is distorted by SPX-top-25 composition changes over
this past year. Those mega-cap techs have long reported the
strongest sales growth, but their total revenues only climbed 9.2%
YoY to $364b.
The
next-20-largest American companies fared far better, seeing their
aggregate sales explode a colossal 26.2% YoY to $769b. But that was
heavily skewed by this past year’s soaring crude-oil prices
catapulting Exxon Mobil’s and Chevron’s quarterly results far
higher. Between Q3’21 to Q3’22, quarterly-average US oil and
natural-gas prices rocketed up 29.5% and 84.3% to $91.37 and $7.96!
That was a great boon for producers.
XOM
and CVX Q3 sales blasted 51.9% and 49.1% higher YoY, dwarfing all
these other elite companies’ growth with the exception of Tesla!
Its quarterly revenues soared 55.9% YoY on fast-growing demand for
electric cars as gasoline prices surged with crude oil. And with
huge quarterly sales of $112b and $67b, XOM and CVX have outsized
impact on the SPX-top-25 total. Excluding them, revenues look way
different.
Simply pulling these oil super-majors out of both comparable
quarters, the rest of these giant American companies saw total
revenues grow 9.8% YoY to $954b. That’s not much ahead of
monthly headline CPI inflation, which averaged 7.9% YoY gains in
these past twelve months. So real inflation-adjusted sales for the
biggest-and-best US companies ex-oil are just barely positive now
with the US economy still deteriorating!
Interestingly strong top-line growth has long been one of Wall
Street’s primary rationalizations for buying overvalued stocks. If
revenues are stalling before starting to roll over in real and
eventually even nominal terms, that would support considerably
lower valuations. Weakening sales growth yields plenty of rich
fodder for this voracious bear. High inflation pinches customers’
budgets, forcing them to buy less from companies.
Insufficient revenues growth also restrains earnings growth, even in
the best of times. And while serious inflation is raging, rising
input costs further erode corporate profitability. Companies simply
can’t pass along all their higher costs in price hikes, as enough
customers will be unwilling or unable to pay those higher prices.
That further impairs sales, spawning a vicious circle increasingly
pressuring corporate earnings.
This
bearish dynamic is already taking root, as the SPX top 25’s total
Q3’22 earnings under Generally Accepted Accounting Principles only
grew 6.9% YoY to $161b. Those market-darling mega-cap techs
actually fared far worse, seeing their aggregate profits plunge
17.8% YoY to $59b! Lower earnings raise their valuations,
giving this young bear more fuel to keep rampaging. But overall
profitability is even worse.
As
the US president loves to rant about, the oil super-majors are
earning massive windfall profits. In Q3 XOM and CVX saw their
earnings skyrocket 191.3% and 83.8% YoY to $19.7b and $11.2b! Just
pulling these two companies out of the comparable quarters, the rest
of the SPX top 25 actually saw total GAAP earnings drop a sizable
9.6% YoY to $130b! Inflation and a slowing US economy are
already hitting profits.
Bear
markets exist to maul stock valuations from overvalued levels back
down to normal ones. They are defined as stock prices divided by
underlying corporate earnings per share, classic P/E ratios. Thus
shrinking profits leave stocks more expensive regardless of
prevailing prices. The longer earnings retreat during a bear from
any cause, the longer that bear is likely to prowl and the more
damage it is likely to do.
Weakening corporate earnings among the elite US companies along with
soaring interest rates are also constraining their stock buybacks.
For most of the decade-plus since October 2008’s stock panic late in
that last serious bear, corporate stock buybacks have been the
biggest and dominant source of capital inflows into stock
markets. Without them, stock prices and the entire S&P 500 would be
way lower today.
Big
US companies financed their massive buybacks over the years through
both ongoing earnings and borrowing, which was cheap during the
Fed’s ZIRP years. But with earnings waning as inflation rages and
debt-servicing costs soaring in this extreme rate-hike cycle,
corporate stock buybacks are plunging. They collapsed 20.1% YoY
to $81b across these SPX-top-25 companies, a precipitous and
ominous drop!
That
was even worse without Exxon Mobil and Chevron, with the rest of the
biggest US stocks seeing their total buybacks plunge 28.1% YoY to
$73b. That would’ve looked much worse still without the mega-cap
techs, that have always been aggressive in manipulating their own
stock prices. Last quarter’s buybacks from Apple, Microsoft,
Alphabet, Amazon, and Meta only retreated a mere 3.3% YoY to a
still-massive $52b!
But
even these elite companies can’t maintain that torrid buyback pace.
This research thread’s table puts stock buybacks next to GAAP
earnings so we can easily compare the two. Shockingly in Q3’22,
Apple earned $20.7b but spent $24.4b buying back its own stock!
Alphabet plowed more into buybacks than its total profits too,
$15.4b on just $13.9b of net income. Flailing Meta’s $4.4b of
earnings supported $6.4b of buybacks.
Over
the long term, stock buybacks can’t exceed some reasonable fraction
of corporate profits. While the mega-cap techs do have vast cash
hoards, they shrunk dramatically in this past year. Their total
cash on hand plunged 21.2% YoY to $372b! They can’t keep
burning cash fast to repurchase stocks forever. And with interest
rates far higher thanks to this uber-hawkish Fed, borrowing for
stock buybacks is too expensive.
Declining stock buybacks going forward will further weaken the US
stock markets, aiding this young bear. And the mega-cap tech stocks
disproportionally dominate stock buybacks, accounting for nearly
2/3rds of the SPX top 25’s total last quarter! So as they are
forced to slow, those elite five stocks responsible for a staggering
21.1% of the entire SPX’s market cap are facing much-lower prices
dragging down everything.
The
big US companies’ mostly-flat real revenues and deteriorating
earnings are very concerning alone with inflation raging and the Fed
aggressively tightening. But the most-bearish fundamental portent
for the SPX-top-25 stocks is their continuing severe
overvaluations. Even after the S&P 500 plunged 25.2% essentially
year-to-date into the end of Q3’22, the elite US stocks still
remained very expensive relative to earnings.
Their average trailing-twelve-month price-to-earnings ratio did
collapse 54.2% YoY, which is good news. But that was largely
because Tesla’s P/E plummeted from 414x to a still-ridiculous 103x.
Exiting Q3’22, these biggest-and-best US companies still averaged a
lofty 29.2x P/E! That is technically still in bubble territory,
which starts at 28x that is double the century-and-a-half fair-value
average of 14x for the SPX.
It’s
shocking to realize that even after losing a quarter of their value
this year the elite US stocks are still sporting dangerous bubble
valuations on average! That almost guarantees this young bear
has a long ways to run yet. Ursa majors don’t give up their ghosts
until they have mauled stock prices long enough and deep enough to
force valuations back under 14x. Violent mean-reversion overshoots
to 7x are even seen!
The
last serious stock bear was that late-2000s one slamming the SPX
that brutal 56.8% lower into March 2009. The SPX’s 25 largest
component stocks then led by Exxon Mobil and Microsoft had
average TTM P/Es of 13.7x exiting that bear-slaying month! The
more extreme valuations are within an ongoing bear, the longer it
will last and the more it will hurt. Today’s bubble valuations
after a 25% SPX decline are scary.
Big
US companies don’t only use their quarterly earnings to buy back
stocks, but to pay dividends. Since receiving those quarterly cash
payments has been a high priority for investors, companies are loath
to cut dividends. Last quarter the SPX-top-25 companies actually
grew their total dividends a huge 37.9% YoY to $41b. XOM and CVX
did skew that a bit, but without them the total dividend growth was
still 32.9% to $35b.
But
with this first inflation super-spike since the 1970s eroding
profits, sooner or later companies will have to cut dividends to
reflect lower earnings. Maybe investors won’t care as much with
bond yields getting competitive thanks to the Fed, but maybe lower
dividends will spawn more stock selling. Mighty Apple’s huge $24.4b
of stock buybacks in Q3 were accompanied by $3.7b in dividends,
totaling 1.36x quarterly profits!
The
SPX-top-25 companies’ operating cash flows also proved strong last
quarter, soaring 27.0% YoY to $228b. That was the highest by far in
the 21 quarters I’ve been advancing this research thread. But big
oil again really distorted that. Removing XOM and CVX, that
comparison moderated to 12.5% YoY gains to $188b. Interestingly the
mega-cap techs only saw 0.1% YoY OCF growth, showing stalling
businesses.
Just
like consumers, when companies start seeing financial pressure they
draw down their cash balances to make up the shortfalls. That is
happening with these elite US companies, as their total cash
treasuries dropped 16.3% YoY to $783b. Excluding those oil
super-majors, their cash hoards plunged 20.8% YoY to $737b!
Mega-cap techs again were slightly worse, seeing their cash fall
21.2% YoY at the end of Q3 to $372b.
While 20%ish cash burn rates could be sustained for a few years,
odds are these companies will slow their spending much sooner. That
will include laying off employees of course, but the low-hanging
fruit for belt tightening is those corporate stock buybacks. Those
waning significantly will add much momentum to this young
bear. The former Facebook now known as Meta is a good example of
what’s coming for more stocks.
Over
this past year ending Q3’22, Meta’s market cap plummeted 61.7%! Its
revenues contracted 4.5% YoY, leading earnings to collapse a brutal
52.2%. Meta tried to paper over that shortfall by drawing down its
cash 28.1%. But it also drastically slashed its stock buybacks
by 52.8% YoY! That contributed to its terrible stock performance.
This week Meta just announced it is firing 13% of its workforce or
11k+ employees!
As
raging inflation and a slowing economy take bigger bites out of
other major US companies, they will be forced to follow Meta’s
cost-cutting path. Not only do lower buybacks further weaken stock
prices, but layoffs hurt the entire economy exacerbating the
recession. This is really ominous with valuations still up near
dangerous bubble levels with a young bear market underway. There’s
a lot of valuation mauling left to do!
That
argues this young bear has a long ways to run yet before giving up
its ghost. Investors should pare their stock-heavy portfolios
before it deepens. Upping cash allocations is one option, but the
US dollar’s purchasing power is being rapidly eroded by this raging
inflation. Gold, silver, and their miners’ stocks are the classic
alternative investments that thrive in general-stock bears, and are
poised to mean revert far higher.
This
gold complex does even better during inflationary times. As raging
inflation erodes corporate profits weakening stock prices, gold
investment demand for prudent portfolio diversification soars.
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 bearish for stock markets.
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The
bottom line is the big US stocks’ latest quarterly results
exacerbated the risks this young bear market is far from
hibernating. These elite American companies’ revenues largely
stalled when adjusted for this raging inflation. And their nominal
earnings actually fell as struggling consumers pull back
discretionary spending. That left average valuations way up in
dangerous bubble territory despite falling stock prices.
Excessive valuations are the fodder that ravenous bears devour,
lingering until they are mauled back down to undervalued levels. A
normal bear mean reversion and overshoot would warn the majority of
this young bear is still yet to come. And corporate stock buybacks’
ability to stave it off is waning as they retreat. So it is prudent
for investors to pare their heavy stock holdings and redeploy some
of that capital in gold. |