Have We Hit The Top?

[ArminvanBuyout]

6 hours ago, Luke said:

First, the diagnosis. In finance and accounting, America has overlearned the lessons of the 1960s through the ’90s. Visionary companies of the time, from Teledyne to Berkshire Hathaway, took the view that the efficient use of corporate capital distinguished good managers from mediocre ones.4 It was undeniable that, at the time, capital was often poorly allocated, and corporate leaders have since made their reputations (and fortunes) by increasing shareholder returns. The drive for the highest possible capital efficiency, however, eventually created bi­zarre incentives. Wall Street’s ideal company became one with no assets and infinitely scalable profits. Great American companies in manufacturing-based, capital-intensive industries, like shipbuilding or steelmaking, were encouraged and finally forced to outsource their manufacturing overseas—not to save on labor costs or improve their output, but simply because outsourcing manufacturing to a foreign third party made their balance sheets look more impressive. If they were unable to offshore, they abandoned product categories altogether, which means the United States entirely lost those industries and capabilities. It is hard to look at Wall Street trends over the past thirty years without drawing the perverse conclusion that the most effective use of capital, in Wall Street’s eyes, is to pour it into financial assets or the valuations of software companies.

 

Some reason for the increasingly high multiple of the SP 500. Question is if this trend reverses a bit with onshoring and anti-China sentiment or if offshoring just slowly changes countries with still chinese manufacturing owners? 

 

Which in turns drivers higher ROIC, which coupled with declining rates, just means average SPY company probably on net is creating more value. 
 

Shift towards tech post-GFC (which have better incremental ROIC vs. banks/cyclicals, etc.) further cements multiple expansion

[Luke]

11 minutes ago, ArminvanBuyout said:

Which in turns drivers higher ROIC, which coupled with declining rates, just means average SPY company probably on net is creating more value. 
 

Shift towards tech post-GFC (which have better incremental ROIC vs. banks/cyclicals, etc.) further cements multiple expansion

Yes, but in that case even better to just own the nasdaq directly if you believe in the longlasting continuity of the tech mega caps, or your favorite tech stock

Edited September 12 by Luke

[mattee2264]

I think that stock markets are still priced for low interest rates. And when markets are dominated by growth stocks low interest rates translate into very high multiples. 

 

The idea though is that we will have "benign" rate cuts i.e. rate cuts because disinflation means that interest rates do not need to be so high rather than rate cuts because the economy is heading into recession.

 

If we do go into recession then even with lower rates you'd expect multiples (and earnings) to fall. And I do not think Big Tech will be spared from this double whammy. 

 

Clearly high multiples also reflect high confidence that market leaders (which are mostly tech) will continue to grow at fast rates. And given the massive investments they've made in AI, they also reflect confidence that AI will be a major source of that continued fast growth.

 

I agree that over the long term PE multiples have structurally drifted higher. 100 years ago 20x earnings was a bull market mania valuation. This century it has been about the norm. Right now we are closer to 30x earnings. Perhaps that could be the new normal if tech dominance continues. And as we saw during the Roaring 20s and the Nifty Fifty Bubble investors are willing to pay very high multiples for blue chip growth companies. The problem is that once you are a blue chip growth company either you mature and your growth slows OR competition/creative destruction can send you into decline. 

 

Big Tech are trying to avoid this fate by being at the forefront of innovation and entering into new markets and basically buying or investing in any emerging competition and are also engaged in all kinds of anti-competitive practices. But it is not an easy feat and there are already signs of cracks.