Big US Stocks’ Q2’21 Fundamentals

The US stock markets continue to power ever higher to an endless series of new records. Leading the way are the big US stocks, with extraordinary gains fueled by the Fed’s radically unprecedented money printing. The winding-down Q2’21 earnings season illuminates how these massive companies are faring fundamentally. While their results were spectacular, their valuations are forging deeper into risky bubble territory.

The flagship US S&P 500 stock index (SPX) enjoyed a very strong second quarter, surging 8.2% to hit a new record close of 4,298. Fully 18 of those 63 trading days ended at all-time highs, driving the extreme complacency permeating these lofty stock markets. Contributing strongly to these outsized gains was the Fed’s ongoing balance-sheet growth. That ballooned another 5.1% in Q2 proper, annualizing to a 20.3% pace!

Over this past year ending June 30th, the SPX soared 38.6% higher! Remember there was a stock panic in March 2020 on fears governments’ pandemic lockdowns would crush the US economy. With the SPX cratering 33.9% in just over a month, Fed officials panicked and slammed the monetary accelerator to the floor. They haven’t let up since, with $120b of monthly quantitative-easing bond monetizations still underway.

The Fed’s balance sheet has mushroomed an astounding 90.7% or $3,910b over the last 16.6 months since that stock panic! The US central bank has nearly doubled the supply of US dollars during that short span! This wildly unprecedented hyper-inflationary monetary backdrop must be considered in all stock-market analysis. Stocks should be strong with redlined money pumps spewing vast torrents of new dollars.

That monetary deluge didn’t just buoy stock prices but fueled anomalously huge growth in revenues and earnings. The Fed has directly monetized $2,741b of US Treasuries in this same post-panic timeframe, its Treasury holdings skyrocketing 108.6%! The US Treasury spent that newly-conjured money on epic stimulus payments, transfer payments, and salaries. That artificially boosted demand for corporations’ products.

While many Americans struggled through the pandemic lockdowns, many didn’t. An average family of four with an adjusted gross income under $150k received about $11,400 of federal stimulus payments over this past year or so! There were other payments too, like extended unemployment benefits. That torrent of trillions of dollars of extra money was partially spent on goods and services offered by big US companies.

The colossal excess demand generated by all that Fed-supplied Treasury-spent money printing is the main reason supply chains are so overwhelmed. We all have friends who have bought big-ticket toys like cars, recreational vehicles, and boats that wouldn’t have made such purchases otherwise without the big stimulus payments. So realize demand and thus corporate sales and profits are skewed anomalously high.

While the Democrats running the US government really want to send more cash handouts to Americans heading into November 2022’s midterm elections, that is going to be challenging. Congress has to pass laws to authorize such payments, and the Democrats only have razor-thin margins of 50-50 in the Senate and 220-212 in the House. So odds are the coming year’s stimulus will be far smaller than this past year’s.

The emergency pandemic unemployment benefits greatly boosted effective take-home pay for millions of workers too. While minimum wages vary by state, the national average is probably somewhere around $10 per hour. That’s the equivalent of $20k per year. But the expanded federal and state unemployment benefits pushed laid-off service workers’ pay up to around a $35k annualized rate! That’s a lot of extra money.

They naturally spent some of that windfall on goods and services from big US companies. How much excess iPhone demand did Apple enjoy because Americans were flush with free money? How much more stuff was ordered from Amazon? How many extra cars and graphics cards did Tesla and NVIDIA sell over this past year thanks to the trillions of dollars of pandemic stimulus? The answer is certainly a ton!

So as we analyze the epic results the big US stocks reported in Q2’21, realize this is probably the high-water mark that was massively artificially elevated by that epic flood of new money. The Fed’s largesse has unleashed the dangerous side effect of serious universal price inflation. That will erode demand for corporate products and margins for selling them, leaving the big US stocks’ results looking worse going forward.

US securities laws require companies to report their latest results within 40 days after quarter-ends. By the middle of this week, 35 of those had passed so the Q2’21 results are mostly in. Every quarter I wade through the latest official 10-Q quarterly reports from the 25 largest SPX companies. Some combination of these popular behemoths dominates nearly all portfolios, including Americans’ prized retirement accounts.

These 25 mega-companies commanded a staggering 41.9% of the entire market capitalization of all 500 SPX stocks at the end of June! The top 25 are bigger than the bottom 441! And the colossal exchange-traded funds tracking the SPX are the largest in the world. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF had $383b, $295b, and $244b of net assets this week!

This table outlines key fundamentals of these 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 Q2’20. After their symbols these companies’ actual percentage weightings within the S&P 500 at the end of Q2’21 are shown, along with their market capitalizations in billions back when that reporting quarter was ending.

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