With
the stock markets near a critical juncture during the most-extreme
economic dislocations of our lifetimes, big US stocks’ fundamentals
have never been more important. After plummeting in a brutal stock
panic on the catastrophic economic damage caused by governments’
draconian lockdowns to fight COVID-19, stocks have skyrocketed in a
monster rally. Are these gains righteous or doomed to fail?
Mid-February feels lifetimes ago, when the flagship US S&P 500 stock
index (SPX) surged to a series of new all-time-record highs. The
last one at 3386.2 capped an epic secular bull that powered 400.5%
higher over 11.0 years. That proved the second-largest and
first-longest in all of US stock-market history, freakishly huge.
Then COVID-19 viciously slammed the markets like a sledgehammer to
the skull.
Over
the next 23 trading days into late March, the SPX plummeted an
astounding 33.9%! Within that was an ultra-rare
stock-panic-grade plunge, a 20%+ collapse in 2 weeks or less.
That was one of the biggest and fastest craterings ever witnessed.
And due to the powerful wealth effect of the stock markets, that
stock panic alone had a real chance of throwing the US into a
devastating full-blown depression.
So
the Federal Reserve started panicking late in that plummeting,
spinning up its printing presses to dizzying speeds. Between
mid-March to late April, its balance sheet exploded a wildly-absurd
record 54.4% or $2,344.0b higher in just 7 weeks! Much of
this was US Treasuries monetized by the Fed’s
radically-expanded QE4, which soared a jaw-dropping 57.4% or
$1,448.4b higher in that same short span.
That
mind-boggling deluge of freshly-conjured fiat money catapulted the
SPX a neck-snapping 31.4% higher by late April! While technically a
new bull market with a 20%+ gain, this crazy move looks exactly like
a monster bear-market rally both technically and sentimentally.
Whether a new bull is underway or a vicious bear remains alive and
well is absolutely the most-crucial question faced by all traders
today.
While the Fed’s near-hyper-inflation has temporarily overpowered
everything else, the ultimate arbiter of whether the SPX continues
higher or rolls over to new bear lows is the fundamentals of its
components. And its biggest and most-important ones just finished
reporting their Q1’20 results in a fascinating earnings season
unlike any other. They clearly reveal whether a new bull or ongoing
bear is more likely.
The
amount of capital invested in the biggest and best US companies
dominating the SPX is just staggering. Some combination of them are
nearly every fund’s top holdings, so they are heavily owned by the
vast majority of all investors and speculators. SPX index funds are
wildly popular, led by the mammoth SPY SPDR S&P 500 ETF, IVV iShares
Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF.
These behemoths have sucked in vast amounts of capital, with net
assets running a truly-colossal $252.6b, $178.0b, and $129.7b in the
middle of this week! Their top components effectively are
the US stock markets, so all traders need to stay abreast of how
they are faring. Thus right after every quarterly earnings season,
I wade through the latest 10-Q results submitted to the SEC by the
SPX’s top 34 stocks.
While that’s simply an arbitrary number that fits into the tables
below, it is a commanding sample. At the end of Q1’20, these top 34
SPX components accounted for a huge 46.7% of this flagship
stock index’s total market capitalization! The top 34’s massive
collective market cap of $10,805.3b exceeded the combined total of
the bottom 453 SPX components. These big US stocks utterly dominate
the markets.
Q1’20’s stock-market action was some of the most extreme ever seen,
making corporate results in that quarter much more important than
usual. More than half of it was the best of times, the SPX
levitating to relentless new record highs on the Fed’s QE4 Treasury
monetizations. But then the COVID-19 stock panic obliterated that
euphoria even before governments’ draconian lockdowns started in
mid-March.
I
can’t imagine a quarter with wilder internal variance in market and
economic conditions. And how the elite big US stocks fared last
quarter including its last couple weeks where economic activity
collapsed under the COVID-19 lockdowns is critical to gaming where
they’re likely heading. Were they earning sufficient profits to
justify their lofty mid-quarter bull-market peak, or their later
monster post-panic rally?
The
tables below include key fundamental data from these elite US
companies as Q1’20 ended. The top 34 stocks’ symbols are
followed by their weightings within the SPX and its tracking ETFs,
then market capitalizations. The absolute year-over-year changes in
the latter from the ends of Q1’19 to Q1’20 are noted. This is a
purer measure of value than stock-price changes, since it
effectively normalizes out buybacks.
That’s followed by quarterly revenues, operating cash flows, and
hard GAAP profits reported to the SEC, along with their YoY
changes. Finally trailing-twelve-month price-to-earnings
ratios are noted. A handful of these companies report on fiscal
quarters offset from calendar ones. In those cases we included the
latest-available quarterly data. Symbols highlighted in blue newly
climbed into the ranks of the SPX’s top 34.
This
latest fundamental data from the big US stocks proved quite
concerning. Outside of the handful of mega-cap-tech
market-darlings, the rest of the top US companies were already
struggling with declining sales and profits! Even as Q1 ended
before the US economy really started collapsing in April, the top US
companies were already ominously trading at dangerous valuations
deep into formal bubble territory.
After bubble valuations, the most-troubling aspect of US stock
markets’ epic secular bull in recent years has been the increasing
concentration of capital in the beloved mega-cap tech stocks. The
Big Five are well-known, universally admired, and widely-held by
virtually everyone. The are Microsoft, Apple, Amazon, Alphabet, and
Facebook of course. You can’t turn on CNBC for 5 minutes without
someone touting them.
While they’ve mostly been expensive in classic trailing-twelve-month
price-to-earnings-ratio terms, they still offered fund managers
amazing growth despite their colossal sizes. So ever-more
capital funneled into fewer and fewer stocks. As Q1’20 ended, these
elite technology giants collectively commanded an astounding 19.8%
of the SPX’s entire market cap! That’s incredibly narrow and
top-heavy, super-risky.
That
all-time-record-high SPX weighting for its top-5 components exceeded
the previous record of 18.3% seen in early 2000 by Microsoft, GE,
Cisco, Intel, and Walmart. That narrow market concentration also
capped a monster secular bull, paving the way for a 49.1% SPX bear
over the next 2.6 years. Today’s record concentration grew even
worse in late April, with the SPX’s top-5 components nearing 22%
of its total!
If
there’s any significant slowing in the Big Five mega-cap techs’
businesses, their stocks are going to drag the rest of the markets
lower. That sure hadn’t started in Q1. Overall revenues among the
SPX top 34 did retreat 2.1% YoY to $949.1b. But that masks the
incredible outperformance of the market-darling tech giants. Their
collective sales soared an amazing 14.0% YoY to $227.7b, fantastic
growth at any size!
But
the rest of the top 34 excluding these mega-cap techs were already
faring much worse even though governments’ heavy-handed COVID-19
house-arrest orders had barely begun. Their total Q1’20 sales
actually plunged 6.3% YoY to $721.4b! That would be an
ominously-sharp business slowdown in any quarter, heralding a
recession. But it is crazy considering over half of Q1 was in a
euphoric stock boom.
There are 13 weeks in a calendar quarter, and the SPX was powering
to new record highs fueled by the Fed’s QE4 Treasury monetizations
in 7 of Q1’s weeks. The next 4 or so saw the SPX plunge into that
stock panic, which seriously damages the optimistic psychology
necessary to fuel strong spending and business activity. But it was
just the last 2 weeks where state governors started garroting their
economies.
So
big US stocks’ revenues should have risen for most of Q1, stalled
during the panic, and then only began to fall during the lockdowns
into quarter-end. Before I did this research work, I assumed the
top 34 SPX stocks excluding the Big Five techs would have flat to
slightly-lower sales. But it was surprising to see them plunge 6.3%
YoY, which is so bad it would normally reflect the US economy in a
severe recession.
Part
of this is explainable by the SPX top 34’s composition changing over
this past year. The four new stocks that surged enough to climb
into these elite ranks, which are again highlighted in light-blue,
had average quarterly revenues of just $5.3b. They include
richly-valued technology stocks NVIDIA, Adobe, and Salesforce.com
that are revenue-light compared to the larger companies they
replaced from Q1’19.
Those averaged revenues of $18.2b that quarter and included Wells
Fargo, Boeing, and Citigroup. But even accounting for the shifting
SPX top 34, revenues were still weak outside of the mega-cap techs.
And slumping sales are really amplified by earnings, which will
force the big US stocks’ high valuations even higher. That’s
a real threat with Q2’20 going to prove disastrous given the ongoing
lockdowns during it.
On
the operating-cashflow-generation front, the huge bifurcation
between the mega-cap techs and the rest of the big US stocks was
even more apparent. Microsoft, Apple, Amazon, Alphabet, and
Facebook reported total OCFs soaring 17.8% YoY to $56.3b. But the
rest of the SPX top 34 excluding the huge US banks fell 8.5% YoY to
$91.3b. The banks’ OCFs are so incredibly volatile that they are
totally ignored.
Statements of cash flows are prominent in most quarterly results,
but mega-banks not only don’t include them in press releases but
never talk about them. They are only found buried deep in 10-Qs
reported to the securities regulators. Big-bank financials are the
most complex I’ve ever seen by far, and even as a CPA and former Big
Six auditor I can’t hope to understand their exceedingly-specialized
and opaque results.
Interestingly big US companies heavily hoarded cash in Q1 as
they saw the writing on the wall from the shutdowns’ dire economic
impact. Their overall cash treasuries surged 11.5% YoY to $911.7b!
And that wasn’t skewed heavily to the Big Five techs. While their
epic cash holdings did grow 12.5% to $458.5b, the rest of the SPX
top 34 also boosted their cash by 10.4% to $453.2b. Companies were
getting worried.
Cash
is life
in dark economic times. The more cash corporations and even
individuals have heading into a crisis, the longer they can pay the
bills and survive with impaired revenues. The leading US companies
were clearly already preparing for a serious storm. And the easiest
way for them to cut expenses is to fire employees, which we’re
seeing in spades with the tens of millions of American jobs
destroyed so far in Q2.
The
SPX top 34’s overall hard earnings under Generally Accepted
Accounting Principles were disastrous in Q1, plummeting 61.9% YoY to
$57.0b! Thankfully that number was heavily skewed by a couple major
factors. First it includes Warren Buffett’s massive investment
holding company Berkshire Hathaway. It is required to flush its
gargantuan investment gains and losses through its income statement
every quarter.
Buffett has long railed against this and hates it. In Q1’20
Berkshire was forced to report a net loss of $49.7b due to the stock
markets plunging into quarter-end! The total investment losses were
actually worse at -$55.6b, with actual operating earnings of the
large stable of Berkshire companies running at +$5.9b. In Q1’19,
Berkshire reported $16.1b in investment gains contributing to GAAP
profits way up at +$21.7b.
Berkshire is the largest SPX component after the Big Five mega-cap
techs, but its reported earnings are so crazily-volatile that they
are best just excluded. Without Berkshire’s results in both Q1’20
and Q1’19, the rest of the SPX top 34 still saw overall GAAP
earnings plunge 16.7% YoY to $106.8b! That’s quite a drop
for a mostly-good quarter, and implies current bubble stock-market
valuations are heading even higher.
The
monumental disconnect between mega-cap tech and the rest of the big
US stocks is even more apparent in Q1’20 earnings. The Big Five
market-darling techs saw their total profits surge 9.9% YoY to
$36.3b. That’s certainly an impressive feat to have strong
businesses as the dire economic impact of the lockdowns loomed.
Microsoft, Apple, Amazon, Alphabet, and Facebook all benefit from
Americans stuck at home.
Microsoft sells productivity software and cloud services, and
companies have been forced to quickly add remote servers with their
employees under house arrest. With connectivity more important than
ever, people have to upgrade old Apple devices and stay in touch
with friends through Facebook. Everyone is buying everything from
Amazon to get delivered, fueling its colossal 26.4% YoY sales surge
even in Q1!
Companies cutting their budgets don’t want to stop advertising, and
Alphabet and Facebook offer them the widest reach and the best bang
for their bucks. So very fortuitously the draconian orders from
governments to fight COVID-19 really favor the mega-cap tech
stocks. But man the rest of the big US companies were already
struggling even in Q1 before the lockdowns went universal to
strangle the economy.
The
rest of the SPX top 34 excluding these Big Five tech giants and
Berkshire saw their GAAP earnings plunge 25.9% YoY in Q1 to
$70.5b! That implies their lofty valuations are heading even
higher, even deeper into dangerous bubble territory. But thankfully
this decline is overstated due to the churn in the SPX top 34’s
ranks. Those 4 new companies in Q1’20 had average quarterly profits
of just $0.6b, really small.
Yet
the 4 they replaced averaged $3.5b in Q1’19. Playing with these
averages, the annual drop in profits among the same big US stocks
from a year ago was closer to 13.7%. That’s still precipitous in a
quarter with a bunch of SPX record highs, and where the lockdowns
only eviscerated the last couple weeks. Odds are corporate earnings
are going to plummet dramatically in this current Q2 with Americans
unable to spend.
Between being unconstitutionally confined to our homes and the tens
of millions of jobs killed by these insane lockdown orders, Q2
results are going to be disastrous. It wouldn’t surprise me to see
the big US stocks’ total earnings be cut in half this
quarter! That’s a huge problem given the bubble valuations in these
elite stocks. Their average trailing-twelve-month price-to-earnings
ratios exiting Q1 were super-high.
The
SPX top 34 averaged a scary 57.4x P/E at the end of Q1’20, which
soared 88.8% YoY! Yet that was really skewed by new addition
Salesforce.com, which was sporting a ridiculous 985.2x P/E.
Excluding it that average collapses to 28.4x, which is way better
but still in formal bubble territory which begins at 28x earnings.
That was actually 6.5% lower and better than Q1’19’s average, stocks
were less overvalued.
But
real bubble valuations in hard trailing-twelve-month terms as Q1’20
ended are super-bearish for the US stock markets going
forward! Ultimately all stock prices must reflect some reasonable
multiple of underlying corporate earnings. The Fed can distort this
truth for a time by aggressively printing money, but eventually
fundamentals overpower that inflation. And the Fed’s
wildly-expanded QE4 is running out of steam.
The
Fed’s far-beyond-extreme balance-sheet growth peaked in mid-March,
exploding 12.6% or $586.1b higher in a single week! In the 5 weeks
since that has steadily contracted to just 1.3% and $82.8b in the
latest reporting week before this essay was published. So the Fed
has drastically squeezed shut that epic liquidity spigot that
catapulted the SPX higher after the stock panic. The flow of money
has greatly slowed.
However much SPX earnings plunge this quarter because of the
lockdowns and resulting catastrophic American job losses, SPX
valuations will rise somewhat proportionally. If profits indeed
collapse by 50% this quarter, valuations will certainly shoot at
least 25% higher. The reason they wouldn’t double on that is it’s
just one quarter out of four in the TTM P/E calculation. That would
still push the SPX top 34’s P/Es to 35.5x!
The
century-and-a-quarter average for the US stock markets is 14x
earnings, which has proven the long-term fair-value level
historically. In order to get anywhere near there, the big US
stocks’ prices would have to be slashed in half. That
implies the bear market is alive and well despite the monster rally
since the stock-panic lows. It has a lot of mauling work left to do
before it returns to its cave for a long hibernation.
At
worst the SPX plummeted 33.9% into late March, a blisteringly-fast
collapse. Yet in bear-market terms that is minor. The prior two
SPX bears ended in October 2002 and March 2009. They clocked in
total losses of 49.1% over 2.6 years and 56.8% over 1.4 years!
There’s no way our current bear will prove far milder given
prevailing bubble valuations and the unprecedented economic
collapse caused by the lockdowns.
And
if that latest bear really ended in late March at just that 33.9%
loss, its total duration would’ve been just 0.1 months. That’s
ridiculously short, way too brief to accomplish a bear’s mission of
forcing stocks to undervalued levels and eradicating all greed and
bullish sentiment. The big US stocks’ Q1’20 results argue the bear
market remains very much alive and well, so the recent bounce was an
epic bear-market rally.
Bear
markets are exceedingly devious, taking their sweet time to inflict
the most pain possible on the greatest number of traders. So sharp
plunges to new bear-market lows that generate fear are quickly
followed by massive bear-market rallies. These are the biggest and
fastest gains ever seen in all of stock-market history by far! They
quickly reestablish complacency, duping traders into believing the
bear is over.
The
classic bear-market strategy is selling stocks and holding cash. If
a bear market cuts stocks in half, holding cash through it doubles
purchasing power so twice as many shares can be bought back once it
runs its course. But cash not only doesn’t appreciate, its value is
rapidly being eroded at a wildly-unprecedented pace from the
Fed’s colossal panicked money printing. The world is being flooded
with new dollars.
Thus
a far-superior strategy is to weather this overdue and necessary
stock bear in gold and the stocks of its miners. Gold tends
to power higher on balance in
strong bulls
after stock panics, and there is nothing more bullish for gold
than astounding currency debasement. The gold miners’ stocks soar
during gold bull markets, with their profits growth amplifying the
yellow metal’s gains. That’s
well underway
today!
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver stocks in our popular
weekly and
monthly
newsletters in mid-March after gold got sucked into the stock
panic. Their absolute unrealized gains are already running as high
as +70% this week! As of the end of Q1, all 1149 newsletter stock
trades recommended since 2001 have averaged annualized realized
gains of +18.7%.
That’s more than double the long-term stock-market average, driven
by a studied contrarian approach. That’s why our newsletters have
been blessed with much success over the decades. They draw on my
vast experience, knowledge, wisdom, and ongoing research to explain
what’s going on in the markets, why, and how to trade them with
specific stocks.
Subscribe today to see our current trades and
enjoy 20% off!
The
bottom line is big US stocks’ just-reported Q1’20 results already
showed significant weakness even with the lockdowns only starting
into quarter-end. While the market-darling mega-cap techs dazzled,
the rest of the leading US companies struggled with shrinking
revenues, operating cash flows, and earnings. They sure knew big
trouble was brewing too, as they greatly ramped their cash to ride
out this economic storm.
Yet
they still exited last quarter averaging dangerous bubble
valuations, despite having just suffered a brutal stock panic! That
virtually guarantees the bear market is still prowling despite the
monster Fed-conjured post-panic bounce. As sales and profits
collapse in Q2 with spending plunging on the house-arrest orders and
the resulting tens of millions of American jobs needlessly lost,
stocks will be forced far lower. | 
