The
US stock-market action last quarter proved a roller-coaster ride.
Big US stocks first surged to record highs on hopes for more huge
pandemic-stimulus spending from Congress. Then with little progress
on that front, the stock markets plunged again. Q3’20 proved a
chaotic quarter leading into this week’s US elections. Its
winding-down earnings season shows whether corporate profits are
justifying lofty stock prices.
With
all the often-surprising election results naturally dominating
market news flow, it’s important to keep our eyes on the fundamental
ball. While stock traders salivate for another big spending bill or
more Fed quantitative-easing money printing depending on the new
balance of power in Washington, stock-market levels are ultimately
dependent on earnings. The government has pulled out all
stops to radically boost them.
After March’s brutal stock panic triggered by states’ draconian
lockdowns to slow the spread of COVID-19, the Fed flooded the US
economy with epic amounts of money. After slashing interest rates
back to zero, in just 3.0 months this panicking central bank
radically expanded its balance sheet by 66.3%! The US-dollar supply
skyrocketed 2/3rds higher as the Fed conjured up $2,857b of
new money out of thin air.
Not
to be outdone, Congress passed the gargantuan record $2,225b CARES
Act pandemic-stimulus bill in late March! It directly paid
Americans with helicopter money, and provided vast loans for
businesses that could be turned into grants if they followed all the
rules. That epic pandemic-stimulus spending was expanded by $484b
in late April with the Paycheck Protection Program. Together they
added up to $2,709b.
With
literally trillions of dollars thrown at the ailing US economy, US
GDP in Q3 skyrocketed at a dazzling record 33.1% annualized pace!
But that was a rebound off of Q2’s record 31.4% annualized
plummeting driven by those lockdowns. Despite all that astounding
Fed money printing and government spending, the US economy still
actually shrunk 2.9% year-over-year by the end of Q3! It was
barely treading water.
But
in early September the flagship S&P 500 benchmark stock index (SPX)
soared to new all-time-record highs, before slipping merely 6.1% by
quarter-end. That colossal deluge of new money certainly helped
levitate the stock markets, which are the core linchpin of
Americans’ economic sentiment. But with extreme bubble
valuations exiting last quarter, foundational corporate profits
weren’t justifying such lofty stock prices.
The
500 elite SPX stocks averaged trailing-twelve-month
price-to-earnings ratios of 32.8x at the end of September! That’s
well into formal bubble territory which starts at 28x historically.
If these companies are weighted by their market capitalizations
instead, that metric looked even more dangerous at 36.8x. That made
Q3 earnings crucial. Would they surge enough on that liquidity
deluge to make stellar stock prices righteous?
Every quarter I wade through the latest operating and financial
results from the 25 largest stocks included in the SPX. These
behemoths effectively are the US stock markets, commanding an
incredible record 43.0% of the SPX’s total weighting as Q3 wrapped
up! All investors need to care about how the big US stocks are
faring, as some combination of them dominate almost all portfolios
including retirement accounts.
The
leading SPX ETFs are wildly popular, led by the gargantuan SPY SPDR
S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500
ETF. A staggering $297.7b, $220.8b, and $159.8b of investors’
capital was deployed in these colossal investment vehicles this
week! The SPX companies are required to report their latest results
by 40 calendar days after quarter-ends, in the form of SEC 10-Q
reports.
It’s
an exceedingly-important time for speculators and investors to
understand how the big US stocks are actually doing fundamentally.
The stock markets are drenched in euphoria surrounding the
elections, on hopes for more huge Fed money printing and more huge
pandemic-stimulus spending. But if that flood of liquidity doesn’t
pan out with the gridlocked-government status quo continuing,
fundamentals will matter again.
This
table outlines key fundamentals of the 25 largest companies
in the US stock markets. Their stock symbols are preceded by how
their rankings within the SPX shifted in the year since the end of
Q3’19. After the symbols these companies’ actual percentage
weightings within the S&P 500 at the end of Q3’20 are shown, along
with their market capitalizations in billions back when that
reporting quarter was ending.
Their market caps, as well as their other fundamental data, are
followed by year-over-year changes from the ends of Q3’19 to Q3’20.
Looking at market-cap changes offers a purer read on companies’
values than stock-price changes, normalizing out some manipulative
effects of corporate stock buybacks. They are done to
artificially boost share prices and earnings per share,
maximizing executives’ compensation.
Quarterly revenues, GAAP corporate profits, earnings per share,
trailing-twelve-month price-to-earnings ratios as of quarter-end,
dividends paid, and operating cash flows generated are shown. These
key data are also followed by YoY changes. Blank fields mean a
company hadn’t reported that particular data as of this week.
Warren Buffett’s Berkshire Hathaway is the main culprit here, it
hasn’t released Q3 results yet.
Berkshire likes to push that 40-day SEC deadline, reporting on the
last Saturday before it arrives. Some companies have goofy fiscal
quarters offset from calendar ones, making them harder to compare
with peers. Adobe’s quarters end one month before calendar ones,
while Walmart, NVIDIA, Home Depot, and Salesforce.com have quarters
running one month after. So their latest-reported quarters are
included here.
Percentage changes are left blank if they are misleading or not
meaningful, primarily when data shifted from positive to negative or
vice versa between Q3’19 to Q3’20. In a quarter where the S&P 500
itself surged 13.0% YoY, its top 25 companies’ results sure didn’t
justify such big gains. Excluding the market-darling mega-cap tech
stocks everyone loves, the biggest and best US companies are
seeing business weaken.
Even
as Q3 ended well before this week’s post-election euphoria on
pollsters being horribly wrong on their blue-wave-sweep predictions,
the extreme narrowness in these stock markets was stunning.
The Big Five mega-cap technology stocks Apple, Amazon, Microsoft,
Alphabet, and Facebook are universally adored and owned. Together
these behemoths commanded a staggering 23.2% of the entire S&P 500!
Wall
Street calls them the stay-at-home stocks, with businesses that have
benefitted greatly from this new cloistered world defined by fears
of catching COVID-19. People need upgraded Apple devices to work at
home and be entertained at home. Americans are ordering everything
they can online, fueling enormous growth for Amazon. Working
remotely from home is also driving soaring demand for server-based
services.
That’s really boosting the massive cloud businesses of Amazon,
Microsoft, and Alphabet. Companies are advertising heavily on
Alphabet and Facebook looking for new customers, as many Americans
are deeply struggling financially with the US economy so hobbled by
infection fears. And with most normal in-person gatherings taboo
these days, Facebook usage has soared as people try to stay in touch
with their friends.
Other stay-at-home tech stocks have proven the fastest climbers in
the SPX’s ranks over this past year. NVIDIA produces fast graphics
processors in heavy demand for gaming, which is the leading form of
in-home entertainment. Adobe’s software is facilitating this
white-collar work-from-home reality. PayPal is seeing big
transaction growth from the major shift underway of buying virtually
everything possible online.
And
Netflix is bringing the streaming television and movie entertainment
for the people not spending their evenings playing video games. The
radical changes society is undergoing in this pandemic have heavily
driven traders’ capital flows into the big US stocks! But it has
exacerbated a stunning bifurcation, which is readily apparent across
the Big Five mega-cap tech stocks and the next-largest 20 SPX
companies under them.
The
beloved Big Five again command a shocking 23.2% of the SPX’s total
weighting, well exceeding the 19.8% of the next 20 stocks. That
hasn’t proven a problem for years now, but eventually the torrid
growth in these huge companies will stall out. Any material selling
in them is a serious risk for the SPX as a whole since they dominate
its weighting. The concentration in a handful of stocks has
never been higher.
Overall revenues among the SPX top 25 in Q3’20 fell 17.2% YoY to
$705.8b. But that decline is overstated, because Berkshire Hathaway
hasn’t reported its latest results yet. Neither has Disney, which
is trying to usurp Netflix’s streaming throne with its fantastic
Disney+ service. Disney hasn’t reported its Q3 either yet, because
that actually ends its fiscal year. SEC 10-K annual reports are due
60 days after quarter-ends.
So
excluding Berkshire and Disney from Q3’19’s results, the SPX top
25’s sales only fell 8.1%. But that is still considerable in light
of the trillions of dollars of money printing and government
spending fueling that skyrocketing Q3 US GDP growth. Americans love
spending money when they can, so falling revenues at these big US
companies implies many people are struggling financially. This
economy is wildly uneven.
The
bifurcation between the Big Five and the next 20 SPX companies is
astounding. Those elite mega-cap techs enjoyed colossal 17.9%
revenue growth last quarter, compared to scary 19.0% shrinkage
for the rest of these biggest US companies! Corporations can’t
withstand falling sales for long without doing big layoffs to slash
costs. Those leave more people without sufficient incomes, forcing
overall spending lower.
This
could spiral into a vicious circle spawning a full-blown
depression, which is what the Fed is so darned worried about.
The more people without normal jobs, the less they can buy from
companies cutting their sales and profits. The less companies make,
the more people they have to fire. The lower their earnings, the
more overvalued stock markets become upping the odds for a new
secular bear further damaging sentiment.
Major stock-market weakness scares the remaining Americans blessed
to be doing fine in this pandemic, leading them to pull in their
horns on spending. That further erodes corporate fundamentals. All
of this can cascade in a devastating negative feedback loop.
Neither the US economy nor the stock markets can thrive for long if
Apple, Amazon, Microsoft, Alphabet, and Facebook are the only
companies doing great!
GAAP
corporate earnings among the SPX top 25 without Berkshire and Disney
actually rose 3.4% YoY to $108.4b. But that is ridiculously
pathetic given the US economy rebounding by a third last quarter per
that record GDP report. And that slowly-rising profitability
certainly isn’t universal, with all the growth coming from those Big
Five mega-cap techs. Their earnings skyrocketed 31.1% YoY to
$52.0b, almost half the total!
The
next-20-largest US companies suffered 13.5%-lower profits
last quarter. Weaker earnings coupled with higher prevailing stock
prices naturally mean higher valuations. The SPX top 25’s average
TTM P/Es soared 54.9% YoY to 41.9x at the end of Q3’20! This small
group of companies encompassing almost 4/9ths of the entire S&P 500
are trading at super-dangerous bubble levels. That guarantees a
bear.
These extreme overvaluations are even more stunning considering the
trillions of dollars of Fed money printing and pandemic-stimulus
payments deluging into Q3’20. How much lower would corporate
profits had been without that epic liquidity flood? And how long
will that fuel increased consumer spending that bolsters companies’
top and bottom lines? Probably not long with so many incomes
still heavily impaired!
Much
of recent months’ euphoric stock-market action, as well as this
week’s in the wake of the elections, resulted from traders’ hopes
for another huge round of pandemic-stimulus spending. That
definitely isn’t a sure thing unless either Republicans or Democrats
fully control the presidency, Senate, and House. But instead of the
false-prophesied blue-wave sweep, gridlock still reigns greatly
lowering the odds for any big deal.
Best
case for these lofty stock markets is Congress approving another
CARES-Act-style spending bill that helps struggling Americans. But
after they spend all that new money within a couple months of
getting it, that still leaves weakening corporate profits driving up
valuations. And there’s an increasing chance a
Republican-controlled Senate and Democrat-controlled House will
continue to refuse to agree on anything.
Trillions of dollars of new spending can delay the inevitable
valuation reckoning for these stock markets again, but probably not
for long. And if that hyper-anticipated next round of pandemic
stimulus fails to materialize, corporate earnings will continue to
deteriorate forcing stock prices to mean revert far lower to better
reflect profits even sooner. Big US stocks’ fundamentals certainly
aren’t justifying their lofty prices!
On
the dividend front, the top 25 SPX companies reported 31.5%-lower
dividends from Q3’19 excluding Berkshire and Disney. Again that was
heavily bifurcated, with the Big Five mega-cap techs seeing 5.4%
dividend growth even though only Apple and Microsoft actually bother
paying them. The next-20-largest SPX companies saw their dividends
collapse 39.3% YoY! That’s partially from the changing SPX-top-25
mix.
The
largest US companies’ operating-cash-flow generation in Q3’20
mirrored the rest of their results. Excluding Berkshire and Disney,
that only slipped 4.2% YoY to $150.9b. But all that growth again
came from the Big Five mega-cap techs, where OCFs surged 18.5% YoY.
That compared to 20.7% shrinkage for the next-20-biggest SPX
stocks! That doesn’t include the OCFs reported by the money-center
banks.
Mega-banks’ operating cash flows are incredibly volatile and
complex, swinging wildly from very positive to very negative quarter
to quarter. So they skew these comparisons. The Big Five tech
behemoths accounted for 52% of the SPX top 25’s OCFs last quarter,
along with 38% of revenues and 48% of profits! So again if their
high-flying businesses slow, stall out, or even reverse, the whole
SPX is in a world of hurt.
The
more that revenue, earnings, and operating-cash-flow growth are
concentrated into fewer stocks, the more brittle stock markets
become. And the Big Five aren’t only vulnerable to something
impacting their amazing businesses. The sizes of their sales,
profits, and OCFs have grown so incredibly massive that big growth
from such high levels is getting ever-harder mathematically. That
could turn sentiment against them.
These mega-cap techs dominating and driving the entire US stock
markets averaged TTM P/Es of 51.5x as Q3’20 ended. That means at
current earnings and stock-price levels it takes these companies
almost 52 years to earn back the prices traders are paying for
their stocks! The historical fair-value average for the broad US
stock markets is 14x earnings, although tech stocks have usually
enjoyed a growth premium.
But
will traders be willing to pay 40x, 50x, or more for these elite
market darlings if their revenues and earnings growth slows? The
Big Five’s average sales and profits last quarter ran $53.1b and
$10.4b, which are colossal numbers to keep seeing double-digit
growth from. Thus even if this pandemic craziness persists, it’s
going to be increasingly impossible for the mega-cap techs to
continue reporting fast growth.
So
make no mistake, today’s stock markets remain very dangerous and at
risk for an imminent major selloff! Despite the trillions of
dollars of Fed money printing and government spending so far,
earnings are nowhere near high enough to justify these
near-record-high stock prices. This week’s euphoria on a gridlocked
US government hopefully preventing Biden’s enormous tax increases
will likely start fading soon.
While another huge pandemic-stimulus-spending bill from Congress
could delay this reckoning by a few months, anything big passing is
far from certain. Eventually speculators and investors are going to
have to face the ugly reality that corporate fundamentals come
nowhere close to justifying these high prevailing stock prices.
They must mean revert way lower to restore reasonable
multiples of underlying earnings.
That
is going to have to take the form of a long-overdue major bear
market. These subtly begin way up near euphoric highs where
everyone is convinced the party will go on forever. Bears are
cunning and devious initially, taking their sweet time to keep
people fully invested despite dangerous valuations. That eventually
inflicts the most pain possible on the greatest number of traders
before bears return to hibernation.
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, the Fed’s
wildly-unprecedented pace of money printing is rapidly eroding the
US dollar’s value. This epic currency debasement changes
bear strategy.
That
naturally leads to much-higher
gold investment
demand, driving the yellow metal’s price higher as bears ravage
bubble-valued stock markets. As gold powers higher on balance, the
major gold stocks tend to leverage its advance by 2x to 3x. While
gold and its
miners’ stocks have been correcting out of
extremely-overbought levels in recent months, they remain the
best destinations for capital in stock bears.
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The
bottom line is the big US stocks’ just-reported Q3’20 results
certainly don’t justify their dangerous bubble valuations. All the
revenues and earnings growth remained concentrated in the handful of
market-darling mega-cap techs. The rest of the elite US stocks
suffered sharply-declining sales and profits last quarter. That was
despite a record GDP surge fueled by trillions of dollars of money
printing and spending!
Whether US lawmakers can work together to pass another huge
pandemic-stimulus-spending bill or not, eventually these lofty stock
prices must reasonably reflect underlying corporate profitability.
That means they need to mean revert far lower in the long-overdue
next bear market. And with pandemic fears still retarding
Americans’ spending and weighing on big US stocks’ earnings, that
serious selloff could start anytime. |