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Big US Stocks’ Q2’23 Fundamentals

CPA, Principal & Co-Founder of Zeal LLC
August 11, 2023

The big US stocks dominating markets and investors’ portfolios have surged dramatically higher in recent months.  That powerful run has fueled widespread greed and complacency, leaving universal bullishness in its wake.  This just-finishing Q2’23 earnings season reveals whether leading US companies’ underlying fundamentals support such euphoric outlooks.  These companies are thriving, but dangerously expensive.

The mighty flagship S&P 500 soared 19.0% between mid-March to late July!  That thrust big US stocks back into formal bull-market territory, with that SPX powering up 28.3% at best above mid-October’s bear-market low.  That left the US stock markets just 4.3% under early January 2022’s all-time record high.  It’s no wonder euphoria reigns today after such an impressive performance, these stock markets are on fire!

Naturally investors love chasing such strong upside momentum in the big US stocks, rushing to pile in.  But after any outsized surge quickly catapults stock markets to seriously-overbought levels, caution is in order.  In mid-July the SPX rocketed 12.9% above its baseline 200-day moving average, really-stretched levels technically!  That portended a rebalancing selloff, and the S&P 500 is already down 2.6% August-to-date.

The core mission of investing is multiplying wealth by buying low then later selling high.  Opportunities for the former are long gone after such a strong run.  That has left big US stocks trading at very-high prices relative to their underlying corporate earnings.  Valuations are extreme, running deep into formal bubble territory!  That makes buying in high today and hoping to sell even higher later to greater fools pretty risky.

The big US stocks’ new Q2’23 results highlight how incredibly expensive these leading companies have recently become.  For 24 quarters in a row now, I’ve analyzed how the 25 largest US companies that dominate the SPX fared in their latest earnings seasons.  These behemoths commanded a dumbfounding 45.3% of the SPX’s total market cap exiting Q2!  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 Q2’22.  These symbols are followed by their stocks’ Q2’23 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 for 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 Q2’23 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 continue powering higher in coming months, or whether a selloff is overdue.

While this recent bull run has proven very strong generating ubiquitous bullishness, it is quite unhealthy internally.  Not only are big US stocks’ valuations at bubble extremes, this advance has been incredibly narrow.  Vast capital has flooded into fewer stocks, leaving the S&P 500 top-heavy with record levels of concentration.  Exiting Q2, again the top 25 SPX companies alone accounted for 45.3% of its total market cap!

This bull market has been overwhelmingly led by the usual beloved mega-cap-tech market darlings, now called the Magnificent Seven.  They include Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and Meta.  These elite giants alone weighed in at a colossal 27.8% of the SPX’s entire market capitalization!  For all intents and purposes, they effectively are the US stock markets.  Few other companies matter much.

There’s no doubt the M7 have awesome businesses, or they wouldn’t have grown so large.  But there is a strong groupthink component to fund managers increasingly allocating more capital to them.  These guys can’t afford to lag their peers’ performances, or investors flee.  So when the lion’s share of market gains are concentrated in a handful of companies, professional investors have to chase them or risk falling behind.

They are paying any price for these high-flying stocks, ignoring how expensive they have become relative to underlying fundamentals.  That upside-momentum-is-all-that-matters strategy works for awhile in bulls, but it isn’t sustainable.  Sooner or later all investors willing to buy high get fully deployed, exhausting their capital firepower for buying.  That leaves only sellers, soon sparking and fueling major snowballing selloffs.

Apart from their extreme bubble valuations, the big US stocks’ Q2’23 looked good.  But the prices investors pay for stocks really matter!  History has proven in spades that generally stocks purchased at relatively-low prices compared to underlying corporate earnings have far-higher odds of subsequently rallying to hefty gains.  But stocks bought at high multiples of their profits often soon roll over into sizable losses.

Overall the SPX top 25’s total revenues last quarter climbed 3.0% year-over-year to $1,153.5b.  But that is overstated due to composition changes.  Over this past year wholesale retail giant Costco climbed into these rarefied ranks, pushing out large biopharmaceutical AbbVie.  But COST runs a high-volume low-margin business, with far-higher sales than ABBV.  Costco did $53.6b in its offset Q2, dwarfing AbbVie’s $13.9b.

Excluding the former from Q2’23 and the latter from Q2’22, the rest of the big US companies actually saw their sales slump 0.5% YoY.  That isn’t much, but bubble valuations are even more precarious without fast growth.  There was a big bifurcation in revenues too, with those Magnificent Seven mega-cap techs seeing sales surge an amazing 8.2% YoY to $411.1b.  These behemoths are mostly still growing at vast scales!

The rest of the big US companies including COST and ABBV only saw Q2 revenues edge up 0.4%.  If they were trading at normal valuations that would be fine, but little growth is problematic at bubble levels.  This was skewed low though by high-revenue oil super-majors, with Exxon Mobil and Chevron suffering brutal 28.3% and 28.9% YoY sales plunges!  That was almost entirely due to fast-falling crude-oil prices.

In quarterly-average terms, those collapsed 32.3% YoY with Q2’23’s running under $74 per barrel.  A major driver of that was the Biden Administration’s colossal 41% drawdown of the US Strategic Petroleum Reserve.  That flooded global markets with an extra 291m barrels of crude oil!  Had oil prices not plunged so much, big US stocks’ total revenues would’ve looked better.  But even a couple M7 stocks saw slumps.

Mighty Apple dominates the S&P 500 with a staggering 7.6% of its market cap.  Its revenues last quarter slipped a slight 1.4% YoY on product sales including iPhones falling 4.4%.  Ominously that was AAPL’s third quarter in a row of declining revenues, becoming a trend!  There’s no way Apple’s stock should trade way up at 32.2x trailing-twelve-month earnings if sales aren’t growing, implying a bigger selloff is looming.

As goes Apple, so goes the rest of the SPX.  And Apple’s retreating sales may prove a canary in the coal mine for other big US stocks.  Americans love their iPhones, with many surveys revealing they are the last things we’d give up.  Yet with raging inflation forcing the prices of life’s necessities far higher, people are increasingly cash-strapped.  More of their incomes are conscripted to pay for food, shelter, and energy.

While they won’t quit buying iPhones, they’ll likely keep their existing ones longer.  Even delaying iPhone upgrades a year or two would dramatically hit Apple’s sales.  Plenty of big US stocks have discretionary products, where customers could easily choose to buy them less often or not at all.  The resulting slowing, stalling, or reversing revenues growth poses serious downside risks ahead for these bubble-valued stock markets.

One of the primary drivers of the S&P 500’s powerful 19.0% surge at best since mid-March was this new artificial-intelligence mania.  The leader of that was NVIDIA, which designs powerful graphics processing chips for computers that are ideal for AI work.  NVDA stock skyrocketed 106.8% in that short span, playing the leading role in inciting bullish psychology.  That left it trading at an absurd 214.1x earnings exiting Q2!

That meant it would take over two centuries at current profits levels merely for NVIDIA to earn back the stock price investors were paying for it.  With a multiple like that, this company sure as heck should have been growing gangbusters.  Yet its actual sales in the last-reported quarter which is offset from calendar ones fell a steep 13.2% YoY!  NVDA had the worst big-US-stocks revenues performance outside of oil stocks.

So this shrinking market leader’s extreme multiple certainly isn’t justified.  There’s also a good chance the recent AI craze filled NVIDIA’s order book with unsustainably-large demand that will wilt.  A few years ago that happened during the cryptocurrency craze.  NVDA’s sales soared on GPU demand for mining crypto, but then plunged when that dried up.  Outsized AI demand could greatly retreat too when this stock bubble pops.

The big US stocks’ bottom-line accounting earnings looked fantastic last quarter, rocketing up 61.1% YoY to $177.8b!  That was despite Exxon Mobil and Chevron seeing their big profits crash 57.6% and 48.7% on those plunging oil prices.  Yet that comparison is seriously skewed by giant investment conglomerate Berkshire Hathaway’s unrealized stock gains and losses, which must be flushed through income statements.

In the comparable Q2’22, BRK reported $66.9b in “investment and derivative contract” losses as the SPX fell 16.4% rolling over into a bear market.  Last quarter that reversed massively to a $33.1b gain with the US stock markets surging 8.3% higher.  The easiest way to adjust for this is simply to exclude Berkshire’s radically-volatile profits from both quarters.  That leaves big US stocks’ earnings grimmer, falling 7.9% YoY.

Again that includes a shocking bifurcation between the M7 mega-cap techs and the rest of the SPX top 25 ex-BRK.  The M7’s profits soared an amazing 27.7% YoY to $77.5b, these companies are still minting money!  But the 17 next-biggest US companies saw earnings plunge 31.0% to $64.3b.  Even if those two oil super-majors are also excluded, profits still dropped an ugly 19.9% YoY to $50.4b which is troubling.

This raging inflation spawned by the Fed more than doubling the US money supply in just a couple years if already eroding corporate profits.  Companies are being forced to pay higher input and labor costs, yet can’t pass along all those price hikes to pinched consumers.  Resulting falling earnings force valuations even higher, a clear-and-present danger for stock markets already trading deep into dangerous bubble territory.

Corporate stock buybacks last quarter were also interesting, with the overall SPX-top-25 number sliding 10.8% YoY to $68.0b for the lowest since Q4’20.  Those beloved M7 stocks heavily reliant on plowing their colossal operating cash flows into manipulative stock buybacks led the way, plunging 30.7% YoY to just $39.0b!  Slowing buybacks are bearish for stocks, as they have long been the biggest source of demand.

The M7 didn’t slash buybacks because their operating cash flows were waning, those actually soared a phenomenal 34.1% YoY to $123.6b in Q2’23!  So the mega-cap techs’ managements may realize their stock prices are way too high and overdue to correct hard.  Or they may be building their colossal cash hoards fearing a coming economic slowdown will adversely impact their operations.  Neither is good news.

While we’re on OCFs here, the next-biggest 18 US companies excluding the largest US bank JPMorgan Chase saw theirs plunge 31.9% YoY to $109.2b last quarter.  Like Berkshire’s earnings, huge banks have super-volatile cash flows partially driven by markets and trading.  But booting out those oil super-majors which saw OCFs plunge, the remaining 15 biggest US companies still enjoyed strong 23.5% YoY growth to $74.6b.

So overall the SPX-top-25 stocks’ Q2’23 results proved rather good, an impressive feat given the stiff headwinds the US economy is facing.  But stock markets’ future performance again heavily depends on stock prices.  If investors are paying too much buying in really high, they are way more likely to see big losses before big gains.  The valuations these elite market leaders are trading at are nose-bleedingly extreme.

Overall these big US stocks’ average trailing-twelve-month price-to-earnings ratios exiting June ran way up at 53.2x, soaring up 107.4% YoY!  Realize that historical fair value for US stock markets over the past century-and-a-half or so is just 14x earnings.  Twice that at 28x is where formal stock bubbles begin.  Big US stocks are nearly double that thanks to the AI craze and hopes the Fed’s violent rate-hike cycle is ending!

These extreme overvaluations are concentrated in those market-darling Magnificent Seven stocks, as their average TTM P/Es skyrocketed 172.1% YoY to an eye-popping 104.1x exiting Q2’23!  That isn’t just skewed high by NVIDIA’s crazy 214.1x, but Amazon is way back up to 302.5x!  Even without those ugly outliers, the other five mega-cap techs still averaged 42.5x.  Those are certainly priced-for-perfection multiples.

Meanwhile the 18 next-biggest US stocks are also well into formal bubble territory, averaging 33.4x TTM P/Es which blasted up 61.0% YoY!  Berkshire is the outlier here due to its colossal unrealized investment losses over this past year.  But even excluding that, the rest of these companies still averaged bubblicious 29.3x multiples leaving last quarter.  This stock-market bubble certainly isn’t limited to those mega-cap techs.

With the S&P 500 just surging up 19.0% in only 4.6 months to seriously-overbought levels stretching way up to 12.9% above its 200dma, today’s bubble valuations are a major problem.  And they could very well balloon even higher as corporate earnings come under increasing pressure as inflationary price increases linger and fester.  Since profits really leverage sales, slowing or falling revenues will exacerbate earnings declines.

Eventually stock prices always normalize to reflect some reasonable multiple of their underlying corporate earnings.  That portends another major selloff looming in coming months with stock prices so darned high relative to profits.  So investors should be wary of expanding their capital allocations to these biggest US stocks.  A major SPX selloff nearing or exceeding the 20% new-bear threshold is growing increasingly likely.

With these lofty stock markets riddled with euphoric and complacent psychology, still way overextended technically, and stock prices deep into dangerous bubble territory, downside risks are mounting.  This bull run’s primary catalysts are rapidly eroding too.  That AI mania has largely run its course, and the Fed’s violent rate-hike cycle nearing or at its end is already priced in.  Stock prices need to mean revert back to reality.

Investors can hedge some of this selloff risk in counter-moving gold and its miners’ stocks, which tend to surge on balance when stock markets materially weaken.  American stock investors’ gold allocations are virtually zero today, far below the 5% to 10% considered prudent for centuries!  And gold and gold stocks are truly great buys, really beaten down after this latest SPX bubble sucked in so much limelight and capital.

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The bottom line is the big US stocks are still thriving fundamentally, just reporting another good quarter.  But recent months’ powerful bull run has left stock prices exceedingly expensive, deep in extreme bubble territory.  Stocks have simply shot far too high relative to their underlying corporate earnings, portending a major selloff ahead.  That could be a serious correction approaching 20%, or a new bear market beyond that.

These dangerous valuations could climb even higher as big US stocks’ fundamentals deteriorate.  Both these companies and their customers are being pinched by inflation’s festering high prices.  Those are starting to slow revenues, which earnings will amplify.  That leaves stock markets increasingly vulnerable to rolling over hard.  Investors should prepare by pruning high-flying stocks and adding counter-moving gold.

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Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.


The periodic symbol for gold is AU which come from the Latin for gold aurum.
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