The big US stocks dominating markets and investors’ portfolios continue to thrive. They are finishing up another earnings season covering a record-breaking quarter, reporting some fantastic results. Still these fat underlying profits are growing far slower than major companies’ soaring stock prices. That has forced valuations deeper into dangerous bubble territory, fueling mounting risks for awakening a new bear market.
Prevailing stock prices are mostly driven by herd psychology, popular greed and fear. That often masks how companies are actually faring fundamentally. But those obscuring sentiment fogs are dispelled once a quarter when new results are released. Companies listed on US stock exchanges have 40-calendar-day deadlines after quarter-ends to file these reports with the US Securities and Exchange Commission.
These comprehensive quarterlies include full financial statements, and management’s discussion and analysis on them. MD&As are often more valuable than financials, illuminating material developments and sharing strategies to achieve future growth. These essential quarterly reports offer the best-available fundamental data on individual stocks, yielding excellent insights into how companies are likely to perform.
By the look of the stock markets, big US stocks must be crushing it. In Q1’24 the flagship S&P 500 stock index dominated by these elite companies blasted 10.2% higher in a powerful one-sided advance. While the SPX achieved fully 22 new record closes last quarter, those relentless gains stretched it to extremely-overbought levels. By late March the S&P 500 had soared 14.1% above its baseline 200-day moving average!
Q1’s strong surge naturally fueled serious greed and euphoria, a warning sign flagging major toppings. Couple hyper-bullish popular sentiment with extreme overboughtness and bubble valuations, and stock investors ought to be wary. That includes all Americans with retirement accounts, which are heavily invested in big US stocks! With the SPX mostly grinding lower since Q1 ended, the reckoning may be underway.
As always big US stocks’ latest Q1’24 results are important for gaming stock markets’ likely direction in coming months. For 27 quarters in a row now, I’ve analyzed how the 25 largest US companies that dominate the SPX fared in their latest earnings seasons. Exiting Q1, these behemoths commanded a stunning record 46.8% of the SPX’s total market cap! 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 Q1’23. These symbols are followed by their stocks’ Q1’24 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, long 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 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 Q1’24 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. Collectively these latest quarterly results from the leading US companies shed light on crucial questions. Are the US stock markets still fundamentally-sound enough to keep rallying on balance, or are they threatened with a major selloff? If the latter, is it likely to be a correction or new bear market?
The US stock markets have grown increasingly top-heavy, which is a serious risk. Exiting Q1, the SPX’s 25 largest component stocks again represented 46.8% of its entire weighting! Dramatically soaring since the 34.8% in Q3’17 when I launched this deep quarterly research thread, that extreme concentration is troubling. The fewer stocks any bull market depends on to drive it, the more fragile and precarious it is.
These US stock markets are heavily reliant on the beloved Magnificent 7 mega-cap technology stocks. Together mighty Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta Platforms, and Tesla now account for a staggering 29.1% of the SPX’s total market cap! The Mag7’s gargantuan total $13,587b exceeded the total of the SPX’s bottom 403 components. These market darlings essentially are the US stock markets.
Their outperformance remains dramatic, with the Mag7’s market cap skyrocketing 50.6% over the year ending Q1’24! That almost doubled the entire S&P 500’s 27.9% gain, which means the vast majority of its other 493 stocks seriously underperformed. While these mega-cap-tech giants are fantastic American companies with amazing fundamentals, their stocks are still exceedingly overvalued as we will soon discuss.
So another dynamic is fueling their outsized gains, and disturbingly it is peer pressure. Since the lion’s share of US-stock-market gains have come from the Mag7, professional fund managers have no choice but to way-overweight their allocations. Without heavy Mag7 exposure, their funds’ performances will lag well behind their peers’. Underperforming too long in the money-management business is the kiss of death.
Investors naturally want the biggest gains, and shift their capital to funds achieving them. Pulling money from lagging funds can quickly strangle and even slay them, so fund managers have crowded into these Mag7 market darlings. The financial media led by CNBC champions this concentrated mega-cap-tech focus all day everyday, creating a groupthink echo chamber. Funds not dominated by Mag7 stocks are rare.
While more capital flooding into fewer stocks has always ended badly historically, the Mag7 once again reported spectacular quarterly results. That makes fund managers’ consuming obsession with mega-cap techs seem more righteous. The phenomenal success achieved by Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla has increasingly bifurcated stock markets. The Mag7 are in a league of their own.
Despite their colossal size and scale, the Mag7’s total revenues surged 13.3% YoY in Q1’24 to $456.3b. Leading the way was NVIDIA riding that AI boom, its sales skyrocketing a jaw-dropping 265.3%! But cracks are spreading even among these elite market darlings. Both Apple and Tesla suffered falling sales last quarter, down 4.3% and 8.7% YoY respectively. These mega-cap techs fully depend on consumer demand.
Recent years’ raging inflation has really pinched Americans’ budgets. While headline inflation rates have moderated considerably, prices remain way higher than pre-Biden-Administration levels. Forced to spend much more on life’s necessities including food, energy, shelter, and insurance, people have much less discretionary income left to splurge on pocket computers and battery cars. Apple and Tesla are feeling this.
Apple actually breaks out quarterly revenues into geographic segments. In the Americas those slumped 1.4% YoY in Q1, reflecting softening iPhone demand. But Greater China’s sales plunging 8.1% YoY was a bigger problem for Apple. China’s ruling Communist Party is whipping up anti-American sentiment, encouraging the Chinese people to buy smartphones from Chinese companies including Huawei and Vivo.
But even if Americans had money to burn, their iPhone upgrade cycle is lengthening considerably. New models have marginal improvements, but existing ones continue to run everything fast for several years or more. Social incentives to upgrade are waning too, as all iPhones essentially look the same. People can’t really tell which models their friends are using, so there’s little prestige in pulling out the latest version.
Apple’s growth years may be over, arguing its stock needs a much-lower valuation. Q1’24 isn’t the first quarter sales dropped. While they edged up 2.1% YoY in Q4’23 on the iPhone 15 launch, they had fallen for four consecutive quarters leading into that! Interestingly when releasing Q1’24 results, Apple tried to distract investors from its weakening fundamentals by announcing a record $110b stock-buyback campaign.
Tesla’s problems are much worse, since its cars are way more expensive. Not only can fewer Americans afford to buy Teslas, but electric-car enthusiasts already own them. The vast majority of car buyers are not interested in electrics for a variety of reasons. So Tesla is trying to sell EVs into a narrow saturated market. Also Tesla owners skew liberal politically, and aren’t happy with Elon Musk’s pro-free-speech stance.
Rather unusually, the next-18-largest US stocks after the Mag7 nearly matched the mega-cap techs’ huge revenues growth. The former’s sales surging 11.4% YoY rivaled the latter’s 13.3%! But that was simply caused by composition changes in the SPX top 25. Bigger companies climbed into these elite ranks over this past year, pushing out smaller ones. Costco and Bank of America displaced Coca-Cola and PepsiCo.
A year ago in Q1’23, COST and BAC were the 28th and 26th biggest US stocks combining for $81.5b in sales. While KO and PEP ranked as 21st and 24th then, they only sold $28.8b worth of sugar water. Without these composition changes alone, next-18-largest sales growth in Q1’24 would’ve been closer to flat. So outside of the Mag7 juggernaut, big US companies certainly aren’t faring as well on the revenues front.
That massive bifurcation between the mega-cap techs and everything else was even more apparent in bottom-line earnings last quarter. The Mag7’s GAAP profits rocketed a shocking 50.0% YoY to $105.5b, while the next-18-biggest US stocks’ plunged 23.5% to $81.4b! While Amazon’s 228.8%-YoY profits growth was amazing, NVIDIA’s monster 768.8% YoY jump to $12.3b was incredible but not sustainable.
NVDA of course is the poster child for artificial intelligence. Its graphics processing chips designed for gaming have been modified to excel in AI tasks, specifically large language models and generative AI. So demand for NVIDIA’s flagship H100 GPUs has skyrocketed, particularly from deep-pocketed hyperscalers like Microsoft, Alphabet, and Amazon rushing to build out cloud AI infrastructure as fast as they can.
But NVDA’s gravy days won’t last. Its AI chips are essentially upscaled from high-end consumer-PC-gaming GPUs. Like Apple NVIDIA doesn’t produce these itself, but contracts manufacturing out to Taiwan Semiconductor. Late last year, Wall Street analysts estimated it cost NVIDIA $3k to $4k each to make H100s, but they could be sold for $25k to $40k! Extreme margins never last long, attracting fierce competition.
Other chipmakers and even the hyperscalers themselves are rushing to design their own AI chips to excel in AI’s enormous parallel processing. Even if they aren’t as cutting-edge as NVIDIA’s GPUs, they will be fast enough and far cheaper eroding NVDA’s market share. So future NVIDIA GPUs won’t be able to command such crazy gold-rush margins. With LLMs difficult to monetize, the whole AI frenzy is also cooling.
Interestingly the next-18-biggest US stocks’ ugly 23.5%-YoY earnings drop last quarter isn’t righteous. Accounting rules force Warren Buffett’s gigantic Berkshire Hathaway investment conglomerate to flush unrealized gains and losses from its vast holdings through its income statement each quarter. Buffett himself hates this and often rails against it, since it results in vast artificial volatility in Berkshire’s profits.
In Q1’24 Berkshire’s bottom-line earnings included $1.9b of investment gains, but a year earlier in Q1’23 those ran a mind-boggling $34.8b! Adjust those out of both quarters, and the next-18-biggest US stocks’ Q1’24 GAAP earnings actually surged a surprising 10.9% YoY! Big pharma were major contributors, with Eli Lilly, Merck, and AbbVie seeing earnings rocket 66.8%, 68.8%, and 472.8% YoY on soaring drug demand!
Leading the way is the GLP-1 agonist drugs for diabetes and weight loss. Eli Lilly’s versions of those are Mounjaro and Zepbound. Sales of the former last quarter hit $1.8b, more than tripling from under $0.6b a year earlier! Q1 sales of the latter which was just approved in November 2023 soared from zero to $0.5b. So people are scrambling for this new class of hormone-suppressing drugs, despite no long-term studies on them.
Maybe GLP-1s will ultimately prove fairly-safe, and demand will continue growing. But maybe the risks will eventually outweigh the benefits. These drugs are very expensive and require ongoing injections, or most of the lost weight soon returns. Doctors also recommend they be used in conjunction with diet and exercise, which people generally aren’t very successful with. So the jury is out on whether this is another fad.
Even if drug demand remains robust, the SPX-top-25 big-pharma companies are relatively small sporting crazy valuations. Exiting last quarter, LLY, MRK, and ABBV had extreme trailing-twelve-month price-to-earnings ratios of 133.4x, 879.7x, and 66.9x! Nothing else came close except NVIDIA trading at 75.9x and Amazon at 62.2x. So even if big-pharma profits keep surging, they won’t move the overall needle much.
Valuations are the major problem with these lofty stock markets, a very-serious one. The Mag7 averaged TTM P/Es of 43.2x exiting Q1, while the next-18-biggest US stocks averaged a scary 82.2x! Historically 28x is where formal stock-market bubbles start, which is twice the century-and-a-half 14x fair value for US stock markets. Those beloved mega-cap techs are deep into bubble territory, despite their great fundamentals.
Extreme overvaluations are dangerous because they always inevitably mean revert then overshoot in the opposite direction. Bear markets exist to maul stock markets sideways to lower long enough for earnings to catch up with too-high stock prices. Bubble valuations can persist for some time while popular greed reigns, but not forever. And it’s not just the mega-cap techs that are overdue for a serious reckoning selloff.
Even excluding those big-pharma outliers, the rest of the next-18-biggest US stocks still averaged near-bubble 26.6x P/Es at the end of Q1. The entire US stock markets are dangerously overvalued, with all 500 SPX stocks averaging 31.0x TTM P/Es leaving Q1! That is understated too, as our spreadsheet we use to track those caps individual P/Es at 100x to minimize outlier distortions. The implications of this are ugly.
Despite their surging revenues, massive earnings, huge stock buybacks, big dividends, and strong cash flows generated from operations, the big US stocks are wildly overvalued. And if the US economy rolls over into a recession as strapped Americans pull in their horns, overvaluations will worsen. Lower sales will be leveraged by plunging profits, forcing valuations even higher. That increases the odds for a major bear.
Unfortunately during euphoric bubble toppings, complacent investors forget how dangerous bears are. Extreme valuations spawned a couple big ones in the early 2000s. The mighty flagship S&P 500 itself plunged 49.1% over 30.5 months from March 2000 to October 2002, and later plummeted 56.8% in 17.0 months from October 2007 to March 2009! Major bears off bubbles can easily cut stock prices in half.
Even lesser bears are no picnic. The last minor one saw the SPX mauled 25.4% lower from early January 2022 to mid-October 2022. And contrary to Wall Street assertions that fundamentally-strong mega-cap-tech stocks are resistant to falling markets, the Mag7 performed far worse. Surrounding that SPX-bear span, the beloved Mag7 stocks themselves averaged brutal 54.6% losses more than doubling the SPX’s!
So despite the big US stocks’ mostly-fantastic Q1’24 results, investors need to stay wary of their extreme overvaluations. This euphoric stock bubble could pop anytime, ushering in a major selloff with high odds of exceeding the 20% new-bear threshold. Investors can prepare by ratcheting up trailing stop losses, and diversifying any excessive exposure out of Mag7 stocks. That capital should be moved into non-tech sectors.
That includes allocating some capital to counter-moving gold and its miners’ stocks. Despite American investors wanting nothing to do with gold like usual during euphoric stock bubbles, it has surged to many new record highs in a remarkable breakout. Fueled by very-strong Chinese investment demand and central-bank buying, this powerful gold upleg has already blasted up 31.2% in 6.4 months and isn’t over yet!
Since Q1 ended, these bubble-valued US stock markets have started rolling over. Sooner or later that will rekindle American gold demand, supercharging gold’s upleg. More record highs will generate more bullish financial-media coverage, increasingly attracting in capital. American stock investors’ total gold allocation now is around 0.2%, effectively zero! They have vast room to buy to rebalance to historic norms.
The gold miners’ stocks are the biggest beneficiaries of higher gold, with their earnings and stock prices really amplifying its gains. While gold stocks are increasingly rallying with gold, they remain way out of favor and deeply undervalued. Our newsletter trading books are currently full of fundamentally-superior smaller mid-tier and junior gold-mining stocks that could easily double or triple from here as gold’s upleg matures!
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The bottom line is big US stocks just reported another great quarter. Led by the beloved mega-cap techs, revenues and earnings utterly soared. But despite that, valuations still remain deep in dangerous bubble territory. The US stock markets are wildly overpriced compared to underlying corporate earnings, which portends a serious bear looming. It will maul markets, forcing stock prices lower until profits catch up.
Despite their fantastic fundamentals, the Mag7 offer no refuge in stock bears. Through the last minor one, these elite stocks averaged terrible 55% losses more than doubling the S&P 500’s. The more overvalued stocks entering bears, the worse they fare in them. But still-undervalued gold stocks will thrive, soaring in a massive mean reversion as gold’s powerful upleg grows. Investors need to diversify into gold stocks.
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