Big US Stocks’ Q4’20 Fundamentals

Ominously a major selloff may already be getting underway, despite the near-record SPX highs recently. The six largest US stocks have all suffered sharp selloffs recently, threatening to spill over into broader stock markets. Apple, Microsoft, Amazon, Alphabet, Facebook, and Tesla saw their stock prices plunge 18.7%, 7.5%, 12.7%, 5.2%, 7.0%, and 36.2% on close over the last month or two!Big selling has arrived.

Moving on to the rest of the quarterly fundamentals, the SPX top 25’s total dividends paid plunged 33.6% YoY last quarter to $30.6b. This is mostly a composition thing though, with high-flying new biggest US stocks not paying dividends displacing older companies that do pay them. The Big Five tech giants’ total dividends grew 5.6% YoY to $7.8b, while the next-20-largest SPX companies’ plunged 41.2% to $22.7b.

Operating-cash-flow generation showed that same massive bifurcation between the mega-cap techs and everything else. While overall SPX-top-25 OCFs in Q4’20 excluding banks climbed 4.1% YoY to $188.9b, all those gains came in the Big Five. Their OCFs skyrocketed 40.4% higher to $118.4b last quarter, wildly better than the 27.4% YoY shrinkage to $70.5b seen in the SPX’s next-20-largest big US companies.

While it is easy to see why Apple, Microsoft, Amazon, Alphabet, and Facebook have attracted such vast swaths of investment capital, these stocks are dangerously overvalued even considering their very-strong growth. And the bigger they get, the harder it will be to keep putting up double-digit growth in revenues and earnings from such massive bases. Last quarter the Big Five averaged $73.0b in sales and $15.6b of profits!

It has to be impossible to keep growing mature businesses at such colossal scales by 10% to 20%+ year-over-year quarter after quarter. The numbers are just too large. And when that blistering growth these mega-cap techs have long achieved falters, their stock prices will likely fall hard given their extreme bubble valuations. As their recent sharp drops prove, even these fantastic companies won’t evade major selloffs.

While those trillions and trillions of dollars of new money force fed into the markets over this past year make contrarians look like fools, I remain one. The odds still favor a long-overdue stock bear rearing its ugly head as those vast liquidity injections wane. After decades of studying stock-market history, it is very clear that stock prices can’t stay super-disconnected from underlying corporate earnings at bubble levels for long.

So realize today’s crazy-euphoric and hyper-complacent stock markets remain very dangerous, still at risk of a serious imminent selloff. That may just be a correction approaching 20%, but with valuations so extreme a full-blown bear market exceeding 50% is increasingly likely. Those are necessary from time to time to maul stock prices long enough for earnings to catch up, normalizing excessive speculative-mania valuations.

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 radically-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. Since gold has been stuck in a miserable momentum selloff in recent months, it and its miners’ stocks are very beaten-down making this a great time to buy in relatively-low.

The bottom line is big US stocks’ recently-reported Q4’20 results revealed that US stock markets remain dangerously overvalued deep into risky bubble territory. All the revenues, earnings, and operating-cash-flow-generation growth is still concentrated in that handful of beloved mega-cap techs. There is a stark bifurcation between them and the other largest US companies, which are seeing fundamentals deteriorate.

And neither the Fed nor the US government can sustain the extreme pace of money printing and stimulus spending that catapulted US stock markets higher in 2020. That radically-unprecedented flood of trillions and trillions of dollars is already slowing. As those epic liquidity injections wane, these Fed-goosed stock markets face a serious reckoning as stock prices mean revert back down to some reasonable multiple of earnings.

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