The big US stocks dominating markets and investors’ portfolios just reported a truly-spectacular quarter. Their collective revenues neared record levels, driving their highest earnings ever witnessed. Yet despite all that, risks abound. The US stock markets have never been more concentrated, relying on fewer and fewer companies. Valuations remain deep into dangerous bubble territory, and market fragility signs are mounting.
The flagship US S&P 500 stock index has enjoyed a banner 2024, blasting up 18.8% year-to-date in mid-July! Traders’ fascination with mega-cap techs involved in artificial intelligence fueled fully 38 new record-high closes this year, over 1/4th of all trading days. The resulting greed and euphoria have left the SPX chronically- and extremely-overbought, mostly stretching far above its baseline 200-day moving average.
Since this latest mighty upleg started powering higher in late October, there had been only one minor pullback until last month. Over several weeks in April, the SPX retreated 5.5%. By mid-July, the SPX had soared an impressive 37.6% higher in just 8.6 months! At that latest record high, the S&P 500 had shot way up to 1.149x its 200dma. Q2’24’s earnings season was getting underway and looking fantastic.
Normally earnings beats stoke bullishness fueling nice rallies in big US stocks. But the SPX ignored them to fall 4.7% into late July. Then Japan’s extraordinary market chaos spooked world traders last week, and the SPX plunged again deepening its pullback to 8.5% over several weeks. This selloff is threatening formal correction territory down 10%+, which would spawn increasingly-bearish sentiment among traders.
In just three trading days, the SPX plunged 6.1% to Monday’s latest pullback low. Inarguably that was Japan-driven. Those were the same few days after the Bank of Japan hiked its rate from a 0.0%-to-0.1% range to “around 0.25 percent”, to attempt to reverse its plummeting yen. That currency had collapsed 14.7% YTD by early July, hitting its worst levels relative to the US dollar since way back in December 1986!
That weaker yen was stoking price inflation, forcing import prices higher which Japan heavily depends on. But that mere 15-basis-point rate hike started unwinding the enormous global yen carry trade. Traders borrow yen for next to nothing, convert it into other currencies, and buy higher-yielding assets including US mega-cap-tech stocks. Unbelievably-heavy and brutal selling slammed Japanese stock markets.
Astoundingly in those three trading days after the BoJ’s little hike from almost zero, Japan’s benchmark Nikkei 225 stock index crashed 19.5%! That included a shocking 12.4% plummeting on Monday alone, the second-worst down day in Japanese stock-market history after Black Monday in October 1987! Fear soared globally, with the S&P 500’s VIX implied-volatility fear gauge skyrocketing to 65.7 that morning!
Though anything over 50 flags extreme unsustainable fear which is always short-lived, the SPX still plunged 3.0% that day. While Japan’s stock-market action was crazy, I can’t recall Japanese stock-market fortunes ever mattering for American ones. That sure looked like a fragility warning, highlighting the precariousness of these lofty US stock markets. Their AI bubble may very well be starting to burst.
For 28 quarters in a row now, I’ve painstakingly analyzed the latest results just reported by the 25 biggest SPX components and US companies. Almost all American investors are heavily deployed in these behemoths due to fund managers crowding in. How big US stocks are collectively faring fundamentally offers clues on what markets are likely to do in coming months. This table includes key SPX-top-25-component results.
Each of these elite companies’ symbols are preceded by their SPX rankings changes over this past year, and followed by their index weightings exiting Q2’24. Next comes their quarter-end market capitalizations and year-over-year changes, revealing how these stocks performed. Looking at market caps instead of stock prices helps neutralize the distorting effects of massive stock buybacks artificially boosting prices.
Next comes a bunch of hard accounting data directly from 10-Q reports filed with the SEC. That includes each SPX-top-25 component’s quarterly sales, earnings, stock buybacks, dividends, and operating cash flows generated. Their quarter-end trailing-twelve-month price-to-earnings ratios are also shown. YoY percentage changes are included unless they’d be misleading, such as comparing positives with negatives.
Overall the big US stocks’ Q2’24 results proved phenomenal, confirming why these companies are the best. But despite their continuing size-defying growth, troubling signs abound. These include extreme concentration, extreme overvaluations, and the overwhelming probability that these outsized growth rates aren’t sustainable. That’s even riskier if the US economy slows down as Americans struggle with inflation.
For years US stock markets have been starkly bifurcated, with the legendary Magnificent 7 mega-cap techs radically outperforming everything else. Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla are universally-loved, averaging mind-boggling $2,287b market caps exiting Q2! These giants are now responsible for a record 32.7% of the SPX’s entire weighting, exceedingly-risky off-the-charts concentration!
That catapulted the SPX top 25’s weighting to 50.2%, also the highest ever witnessed. That’s effectively half the US stock markets, with the Mag7 alone a third! Whenever some subset of these mega-cap techs inevitably suffer heavy selling, they will drag down the broader markets with them. This Monday’s Japanic was a great case in point, with global fear peaking about an hour before US stock markets opened.
At worst soon after, the SPX was down 4.3% intraday. But the comparable losses in MSFT, AAPL, NVDA, GOOGL, AMZN, META, and TSLA were much worse at 5.6%, 10.9%, 15.5%, 7.0%, 9.7%, 7.6%, and 12.4%! Mega-cap techs leading to the downside was even more pronounced during recent weeks’ 8.5% SPX pullback. From their own recent-month closing highs to latest lows, they also plunged way farther.
MSFT, AAPL, NVDA, GOOGL, AMZN, META, and TSLA suffered ugly outsized 15.5%, 11.7%, 26.7%, 17.2%, 19.5%, 16.0%, and 27.2% losses so far in this pullback! And those will deepen if the SPX keeps rolling over into a 10%+ correction or a deeper 20%+ new bear. Market-darling stocks that leverage the SPX on the way up also amplify it on the way down. All that recent selling came despite fantastic Q2 results.
Amazingly given their vast sizes, the Magnificent 7’s aggregate revenues soared 15.3% YoY last quarter to $473.8b! That’s an incredible achievement, which these great companies sure deserve credit for. That trounced the next-18-largest US companies, the rest of the SPX top 25. Their collective sales only edged up 1.6% YoY to $754.6b. Adjusted for CPI inflation now running 3.0% YoY, that’s actually real shrinkage.
But like usual this comparison is skewed by composition changes near the bottom of these elite ranks. Netflix blasted into the SPX top 25 over this past year, displacing oil super-major Chevron. While NFLX did $9.6b in sales in Q2, CVX’s dwarfed that at $51.2b! So had these last few big US stocks stayed stable, next-18-largest revenues growth would’ve looked better yet still really lagged the mega-cap-tech behemoths.
The same was true on the earnings front, with the Mag7’s bottom-line profits reported to the SEC under Generally Accepted Accounting Principles rocketing up 42.4% YoY to $110.4b! That again dwarfed the next 18 largest’s 11.8%-YoY increase to $112.1b. Together the entire SPX top 25’s $222.5b was the highest on record, exceeding Q4’23’s $218.1b! The biggest-and-best US companies are earning tons of money.
Nevertheless these massive profits aren’t sustainable forever and stock prices are way too high even given such colossal earnings. This economy is tough for the great majority of Americans, who are struggling with stagnant incomes yet greatly-inflated prices. Wall Street loves to tout disinflation, the rate of increase moderating. But general prices remain way higher than pre-pandemic levels, a huge problem.
Everyone responsible for a household or business has lots of stories about how expensive everything needed for existing has become. That includes shelter, food, energy, insurance, medical, education, repairs, and the list goes on. The US government’s leading CPI inflation gauge claims general prices have only risen 22.3% since late 2019. But that’s intentionally lowballed for political reasons, reality is far worse.
Based on extensive reading of economics stories in the financial media in recent years, actual inflation is double to triple that. General price levels for necessities are up on the order of 50% to 75%, crushing increases that are difficult to bear! So roughly 9/10ths of Americans are having to make hard decisions on budgeting. They are increasingly mostly buying things they have to, leaving little money for things they want to.
Much-less discretionary income left after necessities is a serious downside risk for sales and profits among most of these SPX-top-25 companies. Everyone loves new Apple iPhones, but with innovation dwindling older models remain fast and useful for several years or longer. If cash-strapped Americans stretch out their iPhone upgrade cycles, AAPL’s revenues and earnings will fall forcing its valuation even higher.
Tesla’s expensive battery cars are way-less-necessary than smartphones, true luxuries. Even upper-middle-class Americans are being pinched by inflated prices, leaving way less money to splurge on new cars. Amazon faces waning-discretionary-spending risks too, as some big fraction of AMZN’s sales are from things people want rather than need. Slower consumer spending would really slam corporate profits.
And when Americans have less money to spend on non-essentials, businesses increasingly face tough sledding. As their sales slow and profits plunge, the easiest expenses for them to slash are marketing. Alphabet and Meta are totally dependent on business advertising, and Amazon and Microsoft also have some exposure on that front. If business ad spends wane in harder economic times, mega-cap tech is in trouble.
With Americans forced to divert higher percentages of their incomes into shelter, food, energy, insurance, and other essentials, most big US companies are at risk of serious slowdowns in revenues and earnings. After the mega-cap techs, the hottest giant company today is Eli Lilly thanks to its GLP-1 weight-loss drugs. LLY sells two variants of these, one for treating diabetes and another just for vanity pound shedding.
In Q2’24, their combined sales skyrocketed 342.4% YoY to $4.3b! That rivals mighty NVIDIA’s 262.1% YoY revenues growth last quarter on stellar demand for its graphics chips used in AI processing. These GLP-1 drugs may be effective, but the jury is still out on longer-term side effects. Yet at $1,000+ per month without insurance, most Americans can’t afford them as inflated prices consume their take-home pay.
They may have to resort to eating less often and exercising more to manage their weights. Out of all these SPX-top-25 stocks, only Walmart and Costco are greatly benefitting from this budget-busting price environment. As this leading discounter and wholesaler save people money, their grocery market shares and sales are growing. I shop at Costco every week to buy fresh food for my family, and it is bursting at the seams!
My kids are both tall-and-strong athletes deep into high-level competitive basketball, along with other sports. I joke with my wife that if it wasn’t for Costco we couldn’t afford to feed them! Despite big price increases even at Costco in recent years, everything from meat to cheese to fruit is way more affordable there. COST operates at razor-thin margins, with membership fees responsible for over 2/3rds of its profits.
Even NVIDIA isn’t immune to an economic slowdown from cash-strapped Americans. Its stratospheric sales and profits growth over the last year was mostly fueled by other mega-cap techs buying its GPUs for large-language-model AI use. But despite hundreds of billions of dollars invested in AI infrastructure, it hasn’t yet found any profitable uses. As revenues slow at NVDA’s customers, so will their GPU purchases.
These lofty stock markets are priced for perfection, fully betting for a US economy led by strong consumer-spending growth for years to come. But with Americans forced to shunt high-and-rising fractions of their incomes into buying necessities at inflated prices, discretionary spending is increasingly dwindling. And slumping revenues are directly leveraged by earnings, which fall much faster. That’s an ominous portent.
The big US stocks’ valuations remain deep into dangerous bubble territory despite their fantastic quarterly results. Exiting Q2, the SPX top 25 averaged 43.6x trailing-twelve-month price-to-earnings ratios! Interestingly that’s the one place there wasn’t a divergence between the Magnificent 7 and the next 18 largest, with average P/Es of 44.2x and 43.4x respectively. These valuations are extreme by all historical standards.
Over the last century-and-a-half or so, fair-value for US stock markets averaged around 14x earnings. Twice that at 28x is where formal stock-bubble territory starts. The longer stock markets spend at bubble valuations, the greater the odds a major secular bear market will awaken to maul prices back down to mean revert and overshoot. Today’s 44x is crazy-high, virtually guaranteeing an overdue bear is stalking!
While big US stocks are earning massive profits, their stock prices are still far beyond levels justified by those. Traditionally major bear markets run until SPX P/E ratios fall under 14x, sometimes as low as half fair-value at 7x. But even if the inevitable bear merely forces P/Es back to a still-very-overvalued 21x, that would more than cut the SPX in half! The beloved Magnificent 7 would lead the way down, faring way worse.
While euphoric traders have forgotten about stock bears, they are serious and not to be trifled with. From March 2000 to October 2002 after the last time the SPX was this overvalued, it plunged 49.1% over 30.5 months! Later from October 2007 to March 2009, the SPX plummeted 56.8% in 17.0 months! There is plenty of modern precedent for bears gutting excessive stock prices, especially starting from bubble toppings.
And even milder minor bears are dangerous, with the last one clawing the SPX down 25.4% from early January 2022 to mid-October that same year. Before that bear, Wall Street asserted that fundamentally-strong mega-cap techs were among the safest stocks. Yet surrounding that SPX-bear span, the Mag7 market-darlings averaged brutal 54.6% losses more than doubling the SPX’s! Bubble stocks are never refuges.
As if that wasn’t menacing enough, slowing discretionary consumer spending will exacerbate bubble valuations giving any bear more fodder. If a big US stock’s revenues slump 5%, its earnings could easily drop 20%+. That means if it had a current average 44x P/E, that could surge near 55x. That makes for proportionally more downside as a bear does its gory work of realigning stock prices with underlying earnings.
Corporate stock buybacks are another big risk along these lines. Last quarter the SPX top 25’s collective buybacks soared 29.0% YoY to $87.7b, still huge but well off Q4’21’s $107.3b record. These buybacks aren’t only done to bid stock prices higher boosting managements’ bonuses, but also to goose earnings per share. Buybacks retire shares, and the fewer outstanding the higher the earnings spread across the remainder.
Like businesses slashing their advertising spending when times are tough, cutting buybacks is the easiest way for big US stocks to preserve cash in a weakening economy. And if these enormous buybacks keep slowing, the earnings-per-share drops will more closely match underlying profits. That too will leave bubble valuations higher than they would’ve been with huge buybacks, exacerbating any rebalancing bear.
Like Americans can’t cut out food no matter how expensive it gets, corporations are loath to reduce their dividends. The SPX top 25’s surged 10.8% YoY to $45.5b in Q2. Many investors and funds rely on these dividends to yield income, and stocks look way less attractive without them. So if companies eventually have to significantly cut dividends due to slowing consumer spending hurting sales, there’ll be hell to pay.
Any big dividend cuts will really intensify bear selling, as we just saw with another big US stock. Once-revered chipmaker Intel isn’t an SPX-top-25 stock, ranking as 73rd at the end of Q2. Just last week in its latest quarterlies, INTC warned it was “suspending the dividend starting in the fourth quarter”. Despite its stock already being quite low, that day alone it plummeted another 26.1%! Dividends are always sacrosanct.
Finally the big US stocks’ cash flows generated from operations last quarter were also strong, surging 12.0% YoY to $239.5b. But again all that growth came from the Mag7, which saw OCFs soar 26.5% YoY to $156.3b! The next 18 largest’s operating cash flows excluding money-center banks plunged 23.8% YoY to $82.2b. But that too was skewed lower by Netflix forcing out Chevron from the SPX-top-25 ranks.
Make no mistake, despite big US stocks just reporting spectacular Q2 results these bubble-valued stock markets remain dangerous. Valuations are still extreme as American consumers have increasingly less discretionary income to spend on wants. Unless general price levels somehow magically retreat back to pre-pandemic ranges, corporate profits are under serious threat. And huge disinflation ain’t gonna happen.
Today’s inflation nightmare gutting Americans’ finances and about to erode stock markets was caused by extreme Fed money printing and out-of-control government spending. In just 25.5 months after March 2020’s pandemic-lockdown stock panic, the Fed recklessly ballooned its balance sheet an absurd 115.6% or $4,807b higher. Despite quantitative-tightening bond selling since, that remains up fully 72.6% or $3,020b!
With top Fed officials itching to start cutting rates soon, they are also tapering their QT bond selling which is the only meaningful way to shrink the US money supply. And no matter who controls the presidency or Congress after November’s elections, neither party will slash government spending back down anywhere near 2019 levels. These inflated general prices are here to stay, which will increasingly weigh on stock markets.
American investors need to prudently diversify their risky stock-heavy portfolios into gold and its miners’ stocks, which thrive in inflationary times. With gold powering up to new nominal records this year on big Chinese-investor and central-bank buying, gold stocks have lots of catch-up rallying to do. They are nearing their tipping point where traders turn bullish and rush in, fueling a massive mean-reversion-overshoot bull.
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The bottom line is big US stocks just reported a spectacular quarter, with near-record revenues and the strongest earnings ever witnessed. Yet despite these great achievements, valuations remain deep into dangerous bubble territory. Even these huge profits are nowhere near fat enough to justify these lofty prevailing stock prices. That portends a looming bear market to maul prices back down in line with earnings.
Even worse, these extreme valuations will likely head higher until that bear really roars. Corporate sales and profits should come under increasing pressure as cash-strapped Americans cut back on discretionary purchases. Inflated necessities’ prices are consuming more of their incomes. Declining revenues will be amplified by earnings, leaving US stock markets even more bubbly. Traders need to reallocate some into gold.
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