The
big US stocks dominating investors’ portfolios have reached a key
technical juncture. They’ll soon either bounce off major support to
extend their bear-market rally or continue breaking down towards
bear lows. Their just-finished Q4’22 earnings season offers great
fundamental insights on which path is more likely. Ominously
exiting last quarter valuations remained high, right on the edge of
formal bubble territory.
The
mighty US benchmark S&P 500 stock index (SPX) contains many of the
biggest-and-best stocks on the planet. Leaving 2022, these giant
companies collectively commanded an enormous $34,246b market
capitalization! Nearly every investor has substantial-to-huge
portfolio exposure to the biggest companies in the SPX. Their
stocks’ fortunes also overwhelmingly drive the price action in
the entire US stock markets.
The
SPX enjoyed a strong Q4, powering 7.1% higher. But that was much
less impressive considering the broader context. In early January
2022, the S&P 500 achieved an all-time-record closing high of
4,797. Then it started nosing over into a major selloff on the
Fed’s
most-extreme tightening cycle ever. In mid-June days before the
Fed’s first monster 75-basis-point rate hike in 27.6 years, the SPX
plunged into a bear.
An
ugly 3.9% down day in anticipation of that uber-hawkish FOMC
hammered the US stock markets into formal bear territory down 20%+.
At worst in mid-October, that grew to 25.4% SPX losses in just
9.3 months! Most of the sharpest surges ever seen in stock
markets erupt out of bear interim lows, the powerful bear-market
rallies. One indeed ignited then with the SPX oversold and bearish
sentiment excessive.
That’s the only reason the US stock markets surged during Q4’22.
That blistering rally initially peaked in late November, with the
SPX rocketing up 14.1% in just 1.6 months! Then that
unsustainable advance stalled out, drifting lower to sideways into
early February. The SPX finally achieved a couple more interim
highs after the Fed chair waxed dovish following the latest FOMC
decision, extending that bear rally to +16.9%.
But
in the month since, the US stock markets have rolled over hard.
Big selloffs hit on an epic seasonal-adjustment-fueled upside
surprise in monthly US jobs, and hotter-than-expected CPI, PPI, and
PCE inflation reports hawkish for the Fed. By mid-week, the SPX
plunged 5.5% since early February! Over 3/8ths of that bear rally’s
gains have been erased, leaving the S&P 500 hovering at a
major-support-zone confluence.
That
includes this strong bear rally’s uptrend support, and more
importantly the SPX’s critical 200-day moving average. Decisive
breakdowns from here would really crush bullish psychology,
fueling selling that could easily cascade. That could soon slam the
SPX down to new bear lows, which are just 9.5% under current levels
at mid-October’s 3,577 closing low. It’s truly do-or-die time for
this latest bear rally!
Big
US stocks’ Q4’22 fundamentals will likely play a role in what
happens next, tilting the scales towards a bearish outcome.
For 22 quarters in a row now, I’ve analyzed how the 25-largest US
companies that dominate the SPX fared in their latest earnings
season. These behemoths alone commanded a massive 39.7% of the
SPX’s total market cap exiting Q4! 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 Q4’21. These
symbols are followed by their stocks’ Q4’22 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
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 Q4’22 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 juggernaut.
 
Naturally stock markets behave very differently in bulls and bears.
High-flying technology stocks often prove investments of choice in
the former good times, while safer high-cashflow-generating sectors
gain popularity in the latter bad times. So rather extraordinarily,
during this past bear year nearly a quarter of these
SPX-top-25 stocks changed! Six smaller market-darlings were knocked
out of these elite ranks.
In
the comparable Q4’21, Walt Disney, Broadcom, Adobe, Netflix, Cisco
Systems, and Nike ranged from the 19th-to-25th-biggest US stocks.
Back then they reported total quarterly revenues running $65.4b and
earnings of $9.7b. Over this past year, those high-fliers were
replaced by Exxon Mobil, Chevron, AbbVie, Merck, Coca-Cola, and
PepsiCo. These new SPX-top-25 stocks are far bigger,
particularly the oil supermajors.
All
six’s sales and profits in Q4’21 ran $196.2b and $25.5b, fully
3.0x and 2.6x larger than those from the stocks they displaced!
So comparisons between Q4’22 and Q4’21 are heavily distorted by this
huge SPX-top-25 composition change. Skewing even worse, those
mighty oil supermajors were last quarter’s best fundamental
performers. XOM’s and CVX’s huge 73.6% and 52.3% market-cap gains
crushed the competition!
Overall the SPX top 25’s total market capitalization collapsed a
sharp 26.9% year-over-year to $13.6t, the worst levels since
Q3’20. The oil supermajors’ strong contrary gains were certainly
justified by their great fundamentals. XOM’s revenues and earnings
soared 12.3% and 43.7% YoY, despite quarterly-average crude-oil
prices only climbing 7.2% YoY near $83. CVX’s rocketed up a similar
17.3% and 25.7% in that span.
In
addition to seeing the best combined sales and profits growth, these
energy giants also remained some of the best fundamental values
among the biggest US stocks. Despite their huge stock-price gains,
XOM and CVX still left 2022 trading at super-cheap 8.9x and 10.1x
trailing-twelve-month price-to-earnings ratios! Had they not
ascended into the SPX top 25, its overall P/E would’ve stayed in
bubble territory at 29.2x.
There’s one other heavily-distorting company in these elite ranks,
legendary investor Warren Buffett’s gigantic Berkshire Hathaway
conglomerate. It is the 5th-largest US company after the usual four
market-darling mega-cap tech stocks. BRK’s earnings plunged from an
epic $39.6b in Q4’21 to a way-smaller $18.2b in Q4’22. US
accounting rules require companies to run unrealized stock gains
and losses through income.
With
the SPX again rallying 7.1% last quarter, BRK enjoyed big $14.5b
unrealized gains. But those were dwarfed by massive $82.4b
unrealized losses in 2022’s preceding quarters as this young SPX
bear awakened. A year earlier in Q4’21, BRK flushed colossal $40.5b
unrealized investment gains through its income statement as the SPX
soared 10.6% that quarter to new record highs! BRK’s profits
follow stock markets.
With
those distorting caveats in mind, the SPX top 25’s overall sales
continued looking impressive in Q4’22. They soared 20.1% YoY to
$1,186.4b. Interestingly that was the highest witnessed during the
22 quarters I’ve been advancing this research thread, and probably
ever. But that’s mostly driven by bigger companies like those oil
supermajors and pharmaceutical giants forcing out smaller
market-darling tech stocks.
Speaking of techs, the big four mega-caps dominating the US stock
markets accounted for a third of SPX-top-25 revenues last quarter.
Apple, Microsoft, Alphabet, and Amazon commanded a staggering 17.1%
of the entire S&P 500’s market capitalization! If these
market-leading generals sneeze, the entire US stock markets will
catch a cold. Ominously their key Q4 fundamental metrics were
worse than their peers’.
The
big-four mega-cap techs’ total sales only edged up 1.7% YoY last
quarter, barely growing. Yet the next 21 largest US stocks enjoyed
awesome 32.0% total revenues growth. Even though that was mostly
due to those six new component stocks, the exceedingly-important
tech market-darlings’ sales growth has nearly stalled out. Apple
actually suffered 5.5% YoY shrinkage, a potential hefty
canary in the coal mine.
Despite that big SPX-top-25 revenues growth last quarter,
bottom-line earnings plunged. Together they reported total profits
of $169.0b, which dropped 16.4% YoY! The mega-cap techs
proved far worse, seeing earnings collapsing 31.7% to $60.3b!
Despite the new bigger companies, the next 21 largest US stocks
still saw their total earnings retreat 4.4% YoY to $108.7b.
Berkshire’s volatility certainly skewed this.
That
huge conglomerate reported an epic $39.6b profit in Q4’21, which
collapsed to just $18.2b in Q4’22. Again that plummeting was driven
by stock-market fortunes forcing unrealized gains and losses through
income. But even excluding BRK from both quarters, the other 24
biggest US stocks still saw their profits slump 7.1% YoY.
And that includes those oil supermajors and large pharmaceutical
companies newly added!
So
the biggest US stocks’ most-important fundamentals are really
deteriorating, which is really bearish for their stock prices.
Those ultimately trade at reasonable multiples of their companies’
underlying earnings per share. Over the last century-and-a-half or
so, fair value in the US stock markets has oscillated around 14x
earnings. Twice that at 28x is where formal bubble territory
begins, which eventually spawns bears.
Exiting Q4’22, these elite US stocks averaged lofty and dangerous
27.7x TTM P/Es. That was just shy of bubble levels, despite
the undervalued oil supermajors entering the elite SPX-top-25
ranks! The big four mega-cap techs averaged 35.0x, while the next
21 largest US stocks looked modestly better averaging 26.3x. These
festering high valuations despite this young bear’s mauling argue it
has a lot of work left to do.
Bear
markets exist for one reason, to force stock prices sideways to
lower for long enough for profits to catch up. Valuations grow
excessive with greed late in secular bulls, so bears awaken and
rampage long enough to force valuations back down to fair value.
That essential mean-reversion process usually sees a sizable
overshoot to undervalued levels before bears give up their
ghosts, sometimes as low as 7x!
So
with these elite US stocks still trading near formal bubble
valuations even after a bear year, odds are great they are still
heading much lower. Even more valuation pressure will come from
this raging inflation unleashed by the Fed’s epic money printing.
In just 25.5 months into mid-April 2022, it ballooned its balance
sheet an absurd $115.6% or $4,807b! That
more than doubled the dollar supply in a couple years!
While the FOMC
slammed though a shocking 450bp of rate hikes in just 10.6
months, high inflation will persist until the majority of that new
money is destroyed. While the Fed has started selling bonds which
shrinks the dollar supply, so far less than 1/8th of that epic
monetary-expansion orgy has been reversed. So price levels will
continue to normalize to a money supply still 101.6% above
pre-pandemic-stock-panic levels!
Relatively-more money chasing relatively-less goods and services
inexorably bids up their prices. High inflation is terrible for
corporate earnings, squeezing them from both ends. Companies
are forced to pay much-higher input costs for their raw goods, but
can’t pass all of these to their customers through higher prices.
If companies raise prices too much, customers balk. They slow or
stop their buying, looking for substitutes.
So
corporate price hikes erode market share, which soon leads to
shrinking sales. That crushes earnings even faster, as they
naturally leverage revenue trends. So even the big US stocks are
facing both lower profit margins as their input costs soar and lower
sales as their customers can’t afford to buy as much of their
products. That portends lower overall SPX-top-25 earnings going
forward, forcing valuations higher!
Interestingly there are already other signs these elite US companies
are facing more financial pressure. They have long loved
manipulative stock buybacks, which are a high priority for
cashflows. In Q4’22, the SPX top 25’s total stock buybacks
plunged 31.9% YoY to just $73.1b! That proved the lowest since
Q1’21. Corporate executives wouldn’t give up their huge bonuses
tied to higher stock prices without good reason.
Those big-four mega-cap techs fought the hardest to keep buying back
their stocks, with their buybacks only slipping 2.5% YoY to $40.3b.
The next-21-largest US companies’ buybacks cratered 50.3% YoY
to just $32.8b! The only reason these giant companies would
radically slow their buybacks is worries about their fundamental
outlooks. Lower earnings ahead will leave less cash to plow into
stock-price manipulation.
Even
these lower stock-buyback levels look unsustainable. While not on
this table, the SPX top 25’s total cash balances fell 12.6% YoY to
$798.3b in Q4. Just like ordinary Americans facing financial
stress, one of its signs at the corporate level is burning cash.
As companies’ incoming cashflow wanes, their spending starts
depleting their treasuries. That process is now underway even at
the biggest-and-best US stocks.
That
isn’t apparent in the SPX top 25’s operating cashflows last quarter,
due to those huge composition changes. Overall these elite
companies’ OCFs surged 12.8% YoY to $217.5b. Those mega-cap techs’
fell 9.7% to $98.0b, while the next 21 largest US companies’ soared
41.8% to $119.5b. But those six new SPX-top-25 companies generate
far-larger operating cashflows than the smaller companies they
displaced.
A
year ago in Q4’21, the replaced stocks reported $10.1b in OCFs while
the new stocks from this past year dwarfed that with $45.1b! Again
Exxon Mobil and Chevron are the main reason, as oil supermajors
generate massive operating cashflows. Overall the biggest US
companies’ deteriorating fundamentals are impairing their operating
cashflows. There’s another way to look at this without all these
distortions.
We
can exclude the six new and six replaced companies from their
respective Q4s, as well as the two US mega-banks JPMorgan Chase and
Bank of America. Their cashflows are exceedingly volatile
quarter-to-quarter, swinging from crazy-negative numbers to
hugely-positive ones. So for years I’ve excluded them from this
quarterly OCF analysis. For Q4’22 and Q4’21, that leaves 17 common
SPX-top-25 companies.
Their operating cashflows reported last quarter fell 8.0% YoY
to $168.0b. Less cash coming in reflects poorer business
fundamentals, which will lead to lower profits and higher
valuations. That leaves more red meat for this ravenous bear to
devour in coming months and maybe years. Lower OCFs also fuel
increasing cash burn rates, leaving less money available to continue
recent years’ huge stock buybacks.
The
very last thing corporate managers will cut is dividends, as that
angers income-seeking investors who flee leading to serious stock
selloffs. Indeed the SPX top 25’s total dividends soared 44.3% YoY
to $45.2b. But that was mostly driven by those six replacements, as
Q4’21’s old ones paid just $3.7b then compared to $13.6b for the new
ones then. Excluding them, the other 19 big US stocks’ dividends
grew 5.5% YoY.
But
eventually deteriorating fundamentals manifesting in lower revenues
and earnings even filter down to dividends. We just saw a
high-profile example of that. As recently as Q1’21, giant chipmaker
Intel was an SPX-top-25 stock. In late January 2023 after reporting
dismal plummeting sales and profits, INTC slashed its dividends
going forward by a shocking 65.8%! That left Intel even deeper out
of favor with investors.
So
this latest Q4’22 earnings season didn’t look pretty. While the
biggest US companies still managed to grow their revenues, their
profits fell sharply. This is going to force their valuations even
higher, even though they were already just shy of dangerous bubble
territory exiting last quarter. Raging inflation will really cut
into both earnings and sales going forward, leaving these elite US
stocks even more overvalued.
Thus
this young bear looks to still have lots of mauling left to
accomplish its mission of mean reverting stock prices back to and
likely under fair value. At these elite companies’ earnings levels
and valuations leaving Q4’22 with the SPX at 3,840, this bear would
still have to nearly cut stock prices in half merely to force
valuations to 14x! A normal overshoot would mean even-bigger
ultimate bear-market losses, which is scary.
Given this bearish backdrop, investors should be wary of their heavy
capital allocations to these biggest US stocks dominating the
markets. They should consider diversifying into gold. Exiting Q4
when all 500 SPX companies commanded that mighty $34,246.4b market
cap, the gold-bullion holdings of the leading American
GLD and IAU gold
ETFs were only worth $79.8b. That implies
gold allocations around just 0.2%!
That’s essentially zero, radically below the 5% minimum prudent
investors have run for many centuries. Even better,
gold soared
during the only two other inflation super-spikes of this modern
monetary era during the 1970s. In monthly-average-price terms from
trough-to-peak CPI-inflation months, gold nearly tripled during
the first before more than quadrupling in the second! Gold
ought to at least double during today’s.
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The
bottom line is the big US stocks’ latest quarterly results revealed
ominous deteriorating fundamentals. While revenues climbed thanks
to big composition changes with a young bear market growing,
earnings plunged dramatically. This raging inflation super-spike
unleashed by extreme Fed money printing is really squeezing
profits. And companies can’t pass along all their higher input
costs without really eroding sales.
Lower earnings are forcing near-bubble valuations even higher,
despite already seriously-lower stock prices from when this bear
awoke. This ravenous beast has a lot of mauling left to do before
valuations are forced back down to or under fair value. So
investors should consider lightening their huge portfolio
allocations in the biggest US stocks. Some of that capital should
be shifted into the ultimate inflation hedge, gold. |