New Ways of Thinking: Party of Five Propels S&P 500 Higher

A mere five companies account for nearly half of the rise of an index of 500 stocks.

After slim profits, or losses, in many quarters, Amazon is the single-biggest driving force behind the S&P 500’s more than 6% gain in 2018.

Amazon, Microsoft, Apple, Netflix, and Alphabet (formerly Google) account for nearly half of the gains of a group of 500.

Amazon is no bargain, but Investors Keep Buying.

Shares of companies like Amazon.com Inc., Netflix Inc. and Salesforce.com Inc. - have surged this year, driving the stock market higher but also pushing valuations to what some investors consider worrisome levels.

The valuation of the average stock in the S&P 500 is now in the 97th percentile of historical levels, according to Goldman Sachs Group Inc., which analyzed 40 years of market pricing and valuation data. The valuation level is thanks in large part to the rise of high-flying tech stocks.

Crowded Trades

Purported Forward P/E Ratio

That chart from the article is a joke.

Not only does it presume earnings estimates will continue rising indefinitely, it is also pro-forma nonsense that ignores alleged "one time" costs that seen to occur with regularity.

Shiller Smoothed P/E Chart

This is the second most overvalued market in history according to the Shiller P/E Ratio.

Obviously this is not a timing mechanism but it is a monster big warning symbol.

New Ways of Thinking

To believe in this market requires new ways of thinking.

“I don’t talk about multiples. That’s where the conversation stops,” Jonathan Curtis, a portfolio manager at Franklin Templeton’s Franklin Equity Group, says of discussions with others about tech companies. “I tell them, ‘Help me understand what this business looks like at maturity.’”

He and others argue that investors have to take a longer-term view of high spending that depresses short-term profits, and so leads to elevated price/earnings multiples.

In other words, it's different this time (until it isn't). The reasons change, the end result won't.

Mike "Mish" Shedlock

Comments
No. 1-5
RonJ
RonJ

"To believe in this market requires new ways of thinking."

Such as allowing banks to lie about the value of their assets? Such as rigged bank stress tests? Such as stating that banks are not financial services companies, in order to qualify them for a particular tax cut?

RonJ
RonJ

"That chart from the article is a joke. "

Really, everything is a joke. The DOW collapsed 89% in 1929-32.

On Wednesday, this becomes the longest bull market on record. The FED has run negative real rates for a record 123 months. Interest rates have been the lowest in 5,000 years- since the dawn of civilization. The meter is on TILT.

Meanwhile, the G20 has changed the rules for depositors. Obviously, something is very out of whack, if the Big 20 are unanimously changing the rules for depositors.

What is behind the curtain, that is being hidden from us? What is the financial calamity they are expecting and preparing for?

Six000mileyear
Six000mileyear

With Party of 5 making up more than 50% of the index rise this year, I wouldn't be surprised if the plunge protection team supports them instead of the entire market.

MntGoat
MntGoat

One thing that seems different to me this go around for the markets in general is that there seem to be way more bears. I actually have a harder time finding bullish people then bearish people. 1999 and 2006 there were far fewer bears IMO, especially really, really negative bears. Or maybe since I was younger and there was less internet info, I just didn't know the bears back then.

This cycle is the first market cycle that has really been fully accompanied by so many economic blogs, alt news sites, economic podcasts, newsletters, etc. This may create a lot of bear group think. In 1999 most people just had CNBC and the Wall Street Journal....maybe a few snail mail newsletters. When I listen to a panel of fund mgrs, RE private equity folks today, etc....everyone talks about what they are doing in case of a downturn, how they know we are late in a cycle, etc.... And many fellow investors I know constantly fret about a coming crash. I did not feel that much of a fear sentiment in 1999 and 2006. Especially 1999 seemed a lot more euphoric across the board.

I don't know if this will mean anything for what comes next, as I count myself as a bear (and have been for a long time!). But just an observation. Its rare that so many people predict a crash before it happens.

thimk
thimk

doesn't ETF's contribute to much of this "imbalance". ?

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