Big US Stocks’ Q4’20 Fundamentals

The many trillions of dollars injected into the US economy by the Fed and US government should have helped the big US companies’ customers buy more from them. Yet that doesn’t seem to be the case. So what happens in 2021 and beyond when that vast deluge of monetary liquidity dramatically wanes?Odds are as that epic money printing seriously slows, Americans will pull in their horns really hurting corporate profits.

Lumped all together, the SPX top 25 saw their total revenues slump 5.7% YoY to $894.6b last quarter. And their total GAAP earnings including Berkshire surged 16.7% to $169.4b. But even despite such very-strong profits growth, their valuations soared. Their stock prices rocketed higher way faster than profits, forcing their trailing-twelve-month price-to-earnings ratios much higher. Valuations remain deep in bubble territory.

Overall the SPX top 25 averaged a scary-high P/E of 96.3x, which skyrocketed a meteoric 258.3% YoY!Thankfully that is misleading, because of the SPX’s monster new component Tesla. That manufacturer of electric cars is a cult favorite, attracting in huge amounts of retail capital at least partially financed by the government’s huge pandemic-stimulus payments over this past year. Tesla’s market cap soared 778% YoY!

Tesla enthusiasts couldn’t care less about earnings or any valuation metrics, as they see this company utterly dominating an all-electric future. They aren’t worried about rapidly-growing competition in Tesla’s markets, convinced it will remain the big winner. All that frenzied stock buying catapulted its stock price to a mind-boggling 1,365.7x trailing-twelve-month profits!This is wildly unsustainable, speculative-mania crazy.

If Tesla’s stock price didn’t budge from the end of Q4’20, and its earnings remained constant, it would take 1,366 years for this company to earn back the price traders are paying for it!The long-term historical average for the US stock markets is a 14x P/E, implying a 14-year payback or a 7.1% earnings yield. Twice that at 28x is dangerous bubble territory. Even fast-growing larger tech stocks can seldom stay over 50x.

No matter how awesome its long-term prospects, sooner or later Tesla’s moonshot stock will be forced to re-anchor with its underlying fundamentals. Interestingly even though this company only earned a trivial $270m in Q4’20, among the worst of all the SPX-top-25 components, that wasn’t from selling cars. Tesla earned $401m in regulatory credits, without which it would’ve lost money. This has been the case for years.

Excluding Tesla’s absurd P/E, the rest of the SPX top 25 still averaged dangerous 41.1x TTM P/Es!And there isn’t much of a difference between the Big Five mega-cap techs and the next-20-largest US stocks. The former averaged 47.4x P/Es at the end of Q4’20, while the latter ex-Tesla weighed in at 39.3x. Not only are these super-risky bubble valuations, but they soared 52.9%, 20.0%, and 65.8% YoY from Q4’19.

This massive “multiple expansion” as Wall Street euphemistically calls it reveals that fundamentals had little to do with the huge stock-price gains over this past year. They were instead driven by those trillions and trillions of dollars of Fed money printing and pandemic-stimulus payments!Even in a very-strong US economy, historically about the best stock markets would offer was valuations trading at half these levels.

Fast-growing market-darling tech stocks might be able to sustain 25x earnings, a growth premium for their big numbers. But 47x is crazy, exceedingly precarious. And normal companies with slower growth might be able to hold on to 18x. So 39x ex-Tesla is incredibly extreme. Stock markets have never been able to hold at levels deep into bubble valuation zones for long. That certainly implies a serious reckoning is looming.

To grow into the rarefied ranks of the 25 largest US companies, all these stocks have great businesses they are adept at running. But no matter how good their operating and financial results prove, eventually their stock prices must reflect some reasonable multiple of their long-term earnings trajectory. If these top US stocks’ prices were cut in half today, they’d still be very expensive. So these bubble extremes have to break.

If these exceedingly-lofty stock prices were driven by last year’s epic capital inflows, what happens this year and next as both the Fed money printing and big government spending taper off?That simply has to translate into less stock demand. As the blistering liquidity-fueled stock-market gains slow, then stop, and finally reverse, momentum selling pressure will overwhelm buying. Then prices will start falling back to earth.

With the average big US stock excluding Tesla sporting an extreme bubble 41.1x trailing-twelve-month price-to-earnings ratio, investors have to be very careful here. History has proven extreme valuations dramatically up the odds of serious selloffs, from major corrections approaching 20% to far-more-serious bear markets often cutting stock prices in half with devastating 50%+ total losses. So caveat emptor way up here!

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