Every once in a while, I’ll check in to show items circulating in Wall Street circles and blogs.
Long-term trends in markets and the economy.
More details on what seems undervalued or overhyped.
Link to some great concept explainers.
**All from 15/02/2023
Share Trader Dads
As the SPY and QQQ crash to all-time highs, the focus of analysts and commentators has turned to whether stocks are moving in accurate bubble territory, are still fairly valued or, despite a strong rally since last October, stocks they still have room to move higher as 2024 progresses.
Like everything in life, it depends on your perspective. Let’s dig a little.
Stairway To Heaven or The Edge of a Cliff?
Frankly, on an absolute basis, it’s hard to make a valid argument that the major stock indexes are cheap right now. This is partly due to the rally we’ve already seen, but also because the index’s underlyings have diverged SO MUCH from each other in terms of valuation.
Many analysts now consistently manage the Magnificent 7 (MSFT, AMZN, NVDA, META, TSLA, GOOGL, AAPL) as their own category and the other 493 companies as their own category because of how detached they have become from each other.
The best argument I’ve heard for a cheap equity market is actually a basket spread trade. By buying a basket of the 493 other stocks and selling the Magnificent 7, then letting them out. The aim is to restore a more reasonably balanced ratio between the teams, but the risk is mainly that these Magnificent 7s continue to dominate and intimidate the rest of the market.
The Magnificent 7 dominates the rest of the market
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The argument that stocks are fairly valued is much more interesting and debatable. First, when valuing with P/E ratios, we can see that current prices for the S&P500 are only 1 standard deviation above the long-term average. Nothing too extreme.
Additionally, as we saw earlier, when we tease out the 7 largest tech companies, the rest of the index comes in at a reasonable 18x.
Digging into Magnificent 7, NVDA—the King above all right now—actually has a good logic behind its rise. We can see that while the stock has exploded higher, earnings for NVDA have exploded as well. This suggests that the rapid ascent is based on actual earnings rather than guesswork or sentiment. As long as NVDA continues to meet its forecasts, the market cap and trajectory are within reasonable accounts.
As long as the blue line goes up, the white line will continue to follow
Unlike finding a reason for cheap stocks, Chicken Littles abound with chart crimes that suggest we’re in for an impending crash. Adjust those chart axis scales and starting points enough and you can make anything look like anything.
Below are two of my favorite offenders. See if you can guess why reports of the market’s death are wildly exaggerated.
Hint: what if the bubble was at 300?
Hint: Any correlation of “independent” data above 0.75 should be double-checked
Overall, it looks like almost nothing is cheap right now, but “S&P493” is relatively cheaper than the rest of the “Magnificent 7”. That said, just because they’re expensive doesn’t mean they won’t continue to be expensive for the foreseeable future.
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Thoughts; Questions? comments;
I arrive! Maybe I’ll do a full post on the topic or as a Q&A
