Have We Hit The Top?

[ArminvanBuyout]

Interesting read on US outperformance

https://www.bridgewater.com/_document/us-exceptionalism-drivers-of-equity-outperformance-and-whats-needed-for-a-repeat?id=00000192-48f2-d1cc-ab9b-fbf6d9e30001

[mattee2264]

Short term at least I think US outperformance seems pretty darn likely.

 

US economy continues to show resilience (although I think a lot of it is due to the trillion plus dollar deficits and government hiring spree) but the Fed seems determined to aggressively cut interest rates. I imagine all the AI capex is also probably having some multiplier effects in the same way the US economy accelerated during the dot com bubble. 

 

And a bubble cannot fully form without the impetus of easy credit and that's been the missing ingredient so far in the AI bubble as rising interest rates have been a headwind. 

 

I'm an AI sceptic but it is the stuff that bubbles are made of: a revolutionary technology that promises to  boost productivity, cut costs, increase margins and extend the growth runway of the tech mega-caps. Big Tech CEOs feel forced to invest huge amounts which is propelling NVIDIA to the stratosphere and corporate CEOs will also feel forced to invest in whatever products Big Tech put out because they know all their competitors will be doing so and everyone likes to try out a new technology and the idea of automating mundane tasks allowing companies to lay off lots of workers is an easy sell. 

 

The problems probably arise a few years down the line if expending more and more computing power fails to bring about further advances in the technology and the AI products fail to deliver the hoped for benefits or the costs outweigh the benefits which would make it difficult for Big Tech to achieve payback on their huge investments let alone a return and if they then cut back on their spending that will hurt the semiconductor companies who are minting money at the moment. 

Edited October 14 by mattee2264

[UK]

https://www.bloomberg.com/news/articles/2024-10-15/trump-defends-economic-agenda-saying-tariffs-will-fuel-growth?srnd=homepage-europe

 

"The former president has vowed to carry out an aggressive campaign of deregulation, renew expiring tax cuts, lower the corporate tax rate to 15% from 21%, and offer fresh tax reductions and benefits to bolster domestic manufacturing — policies cheered by prominent Wall Street and corporate leaders."

 

"Former US President and Republican presidential nominee Donald Trump says the US will go to “third world status” if the dollar loses its status as the world’s reserve currency."

 

I know politics is not allowed to discuss here, and not without good reason:), but boy if Trump wins this election and maybe if Republicans also take the Senate, would not this be very bullish for US market? And much more important than other near/mid term factors, including what FED is going to do? The one thing I did not liked until recently is Trumps team talk about how strong USD is bad for US, but it seems even here they recently came to their senses. I know the consensus is that locked government would becthe best for the market, but perhaps, other than somewhat  higher probability of some long tail risks (more so 4 years later:)), I just do not see how this scenario would not be more bullish for the stock market and US economy in general? 

 

https://www.bnnbloomberg.ca/business/2024/10/02/trump-election-sweep-likely-bullish-for-us-stocks-rbc-analysts-say/

 

Sorry if this post is too not appropriate but I feel it is quite an important one to consider, so lets not go into discussing the politics or the persons too much, only their possible impact on the market:)

 

Edited October 17 by UK

[thowed]

Oof - I think it is always dangerous to predict Macro - effect if one person gets in.  All I remember is:

 

2016: 'everybody knew':

1) Trump wouldn't get in.

2) If he did, the markets would tank.

 

So even if you got 1) right, you'd probably get 2) wrong.

 

Therefore personally I don't want to think top down about this.

 

 

 

[UK]

18 minutes ago, thowed said:

Oof - I think it is always dangerous to predict Macro - effect if one person gets in.  All I remember is:

 

2016: 'everybody knew':

1) Trump wouldn't get in.

2) If he did, the markets would tank.

 

So even if you got 1) right, you'd probably get 2) wrong.

 

Therefore personally I don't want to think top down about this.

 

 

 

I kind of agree and do nothing about this really, but at the same time think all this agenda, especially deregulation, could induce more animal spirits for US market and hitting the top could as well be postponed or could be at the even higher level. Again, nothing more, but the pure speculation...all this thread is about anyway:)

 

Edited Thursday at 08:06 AM by UK

[mattee2264]

I think the lesson is that no-one should underestimate the ability of fiscal and monetary policymakers to help the stock market defy gravity or their willingness to do so.

 

Global central banks are all on course to ease aggressively even though their economies are doing just fine all things considering.

 

Whoever gets elected is going to continue to run huge fiscal deficits to juice the economy.

 

An over-easy policy stance in theory is inflationary but because its impact just seems to find its way into asset prices rather than the real economy the main inflationary impact is going to be on asset prices. And so long as there is a free lunch or the price lies far ahead in the future policy makers aren't going to care. 

 

Also the AI ecosystem is incredibly circular so incredibly self-reinforcing. Big Tech are minting money so can afford to spend huge amounts in AI capex regardless of the state of the economy or interest rates or tax rates or whatever else. This in turn boosts the earnings of chip companies and reinforces AI enthusiasm. No one seems to consider the possibility that it could be mal-investment or overinvestment and the future returns might not be sufficient to justify them. Instead markets are hyped up on the near term growth of the chip makers and the assumed future growth both of Big Tech and their AI products and the rest of the market and the economy based on the assumed productivity/efficiency improvements AI will deliver.

 

And as long as the articles of faith are that:

-Policy makers can manage the economy so that deep long recessions and financial crises are a thing of the past

-AI is going to allow trillion dollar companies to continue to grow at fast rates and result in a productivity miracle for the rest of the economy

 

Then I really think the S&P 500 could rise an awful lot more from now. 

 

GMO have a nice table comparing 2000 and now. They claim the media PE was 60 in 2000 for the top 10 companies compared to a median of 27x now. So on that basis we could see markets double over the next few years before we hit a bubble peak. 

 

Of course there is a bit of a difference because the mega-caps are a much higher percentage of GDP and are more mature and while the pitch with the internet was that the new economy would replace the old economy e.g. e-commerce, digital advertising, with AI the idea is that it will allow companies to expand margins and cut costs and the resulting cost-savings will presumably be the AI companies revenue. 

 

 

Edited Thursday at 11:59 AM by mattee2264

[UK]

Nice comparison, but BRK is cheaper than this headline gaap number suggests, on the look through basis.

[UK]

Just ask David: https://finance.yahoo.com/news/billionaire-investor-david-einhorn-says-232814929.html

[Gregmal]

17 hours ago, UK said:

Just ask David: https://finance.yahoo.com/news/billionaire-investor-david-einhorn-says-232814929.html

He s a whiny broken record. Who never learns.

[UK]

https://www.economist.com/special-report/2024/10/14/why-the-american-stockmarket-reigns-supreme

[Spekulatius]

On 10/17/2024 at 10:18 PM, UK said:

Just ask David: https://finance.yahoo.com/news/billionaire-investor-david-einhorn-says-232814929.html

Should be great for him. He runs a hedge fund who goes long undervalued stocks and shorts overvalued ones supposedly. He really should go to CNBC and say “I feel like an oversexed dude in a whorehouse”, if he believes in what he says.

Edited Saturday at 02:27 PM by Spekulatius

[Fly]

https://www.msn.com/en-us/money/markets/goldman-predicts-a-paltry-3-return-for-s-p-over-the-next-decade/ar-AA1sAZ2B
 

Goldman predicts 3% annualized for next decade

[Junior R]

2 hours ago, Fly said:

https://www.msn.com/en-us/money/markets/goldman-predicts-a-paltry-3-return-for-s-p-over-the-next-decade/ar-AA1sAZ2B
 

Goldman predicts 3% annualized for next decade

Apollo expects same at Index level a lot of front loading has been done on stocks...It will take awhile for PE to contract to historical value based on EPS

 

Quote

Low Returns Expected in the S&P 500 Over the Coming Years

Looking at the historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio at almost 22 implies a 3% annualized return over the coming three years, see chart below. In other words, when stocks are overvalued like they are today, investors should expect lower future returns.

 

[Gregmal]

Thank goodness they come out and state this. I’d feel weird if for the first time in a decade, that we didn’t get the annual “stocks are expensive and future returns will be low” spiel from someone.

[Blake Hampton]

I don’t see how anyone rationally minded could currently think that we’re not in an everything bubble. All of these asset classes, and I’m speaking on overall valuation metrics, seem completely detached from their fundamentals. Equities, fixed income, real estate, all bubbles.

 

The last two sizable crisises, being 2008 and 2020, were almost certainly Great Depression levels events. Our asses were only saved due to massive amounts of government bailouts and stimulus. To me, the question then is when does this dynamic fail? The governemnt can keep bailing us out until they can’t, what then?

 

Huge deficit spending is happening, with it being almost entirely financed on the short end of the treasury curve. The government is essentially printing cash to fund their spending. This isn’t even mentioning how both candidates are floating more tax cuts and not addressing the issue whatsoever. What happens when inflation finally arrives and in turn, interest rates have to go up? What effect does this have on markets?

 

I do not feel good about the future.

[nwoodman]

Some intriguing graphs in Bloomberg today.  Hardly an inspiring outlook for the major US indexes, especially if there is a corporate tax hike in the offing.  Cap gains tax increase would be a double whammy.

 

 

 

 

 

 

 

 

Edited Monday at 05:42 AM by nwoodman

[Sweet]

The SP-500 fwd PE is 22, it was like 50 during the dot.com bubble.  I’m fine with saying valuations are more expensive than historically but those charts are misleading.  I don’t know how many times I’ve seen these comparisons made over the past 15 years, and if you just index into the SP-500 everytime you’ve seen these charts posted you’d have 3-5x your money.

 

Edited Monday at 08:07 AM by Sweet

[Sweet]

Don’t know if true, but this is funny:

 

 

[nwoodman]

1 hour ago, Sweet said:

The SP-500 fwd PE is 22, it was like 50 during the dot.com bubble.  I’m fine with saying valuations are more expensive than historically but those charts are misleading.  I don’t know how many times I’ve seen these comparisons made over the past 15 years, and if you just index into the SP-500 everytime you’ve seen these charts posted you’d have 3-5x your money.

 

Ah those whacky analysts that we love to disparage.  Don’t disagree there is always room for further multiple expansion. Also agree that the graphs getting published and hand wringing means this ain’t the top. IMHO not the strongest an investment thesis, even American exceptionalism has its limits. Especially if that exceptionalism may be underfunded in order to stay exceptional.

Edited Monday at 09:57 AM by nwoodman

[UK]

https://www.bloomberg.com/news/articles/2024-10-21/carson-block-says-close-your-eyes-and-buy-us-stocks-not-china-m2ikwagi

 

“It probably pays to not think too much, just close your eyes and buy probably Magnificent Seven,” Block said in an exclusive interview with Bloomberg TV. “In the past few years, I have looked back on my career as an activist short seller and done the math and felt like I probably could have just been” long the S&P 500, he added.

 

 

 

Edited Monday at 10:19 AM by UK

[nwoodman]

1 hour ago, UK said:

https://www.bloomberg.com/news/articles/2024-10-21/carson-block-says-close-your-eyes-and-buy-us-stocks-not-china-m2ikwagi

 

“It probably pays to not think too much, just close your eyes and buy probably Magnificent Seven,” Block said in an exclusive interview with Bloomberg TV. “In the past few years, I have looked back on my career as an activist short seller and done the math and felt like I probably could have just been” long the S&P 500, he added.

 

 

 

That is too funny. Might be time to go to cash

[Sweet]

2 hours ago, nwoodman said:

Ah those whacky analysts that we love to disparage.  Don’t disagree there is always room for further multiple expansion. Also agree that the graphs getting published and hand wringing means this ain’t the top. IMHO not the strongest an investment thesis, even American exceptionalism has its limits. Especially if that exceptionalism may be underfunded in order to stay exceptional.

 

The SP-500 is up 20+% this year and the forward PE multiple is lower than this time last year.  Just pointing out that stocks can go up and multiples can come down.

 

Edited Monday at 11:58 AM by Sweet

[Castanza]

People miss the forest for the trees with these headlines. If you're selling in a major drawdown what's the likely cause? Debt, expenses too high, cashflow too low. If you are seriously concerned about market conditions moving forward maybe you should leave that 401k and brokerage account alone, divert some funds and reduce your debt and bump up your emergency fund. Lot of people out there with 50k Robinhood brokerage accounts, underfunded Roths, 401ks, HSAs sitting on $1k a month auto loans, 2k a month mortgage loans, 10k +CC debt and a stack of Amazon boxes on their porch every time they open the door; all being nursed by their talentless middle management job that could be replaced with a snap of the finger. 

 

Either make yourself more valuable, or your personal finances unbreachable by emergency situations.

 

 

[Dinar]

This is idiotic.  You need to factor in interest rates.  30 Year TIPS yield was north of 4%+inflation in 1990s, today it is around 2%+inflation.  Also, CAPE (which is not a Shiller P/E but actually Ben Graham's invention) is a poor indicator if you have massive inflation like we did from 2019 to 2023.  Stock market is overvalued when CAPE is 10 if you can buy TIPS at 10%+inflation or Class A real estate in markets with barriers to supply and favorable demographic at say 8% cap rate.  It may be cheap at a 25 CAPE if TIPS are at 1%, cap rates are a 4.5%, and cash is yielding inflation+0.

[Gregmal]

17 minutes ago, Castanza said:

People miss the forest for the trees with these headlines. If you're selling in a major drawdown what's the likely cause? Debt, expenses too high, cashflow too low. If you are seriously concerned about market conditions moving forward maybe you should leave that 401k and brokerage account alone, divert some funds and reduce your debt and bump up your emergency fund. Lot of people out there with 50k Robinhood brokerage accounts, underfunded Roths, 401ks, HSAs sitting on $1k a month auto loans, 2k a month mortgage loans, 10k +CC debt and a stack of Amazon boxes on their porch every time they open the door; all being nursed by their talentless middle management job that could be replaced with a snap of the finger. 

 

Either make yourself more valuable, or your personal finances unbreachable by emergency situations.

 

 

I think a large part of the problem is that many of these people just never invested because no matter what they always think stocks are expensive. So when you’ve missed the last 1/3/5/10 years, it’s hard to get involved now knowing you messed up previously, and thus like a lot of underperforming money managers, it’s so much easier to put out this arrogant facade of “I didn’t miss anything, I’m just smarter than everyone else and know the market is going to crash” spiel. When I hear that stuff, like with Einhorn, you know their returns suck and it’s just excuse making.