Techquity
Technology Investor, Fundamental Research
The S&P 500's top 30 stocks cost three times as much per dollar of free cash flow as the other 470, despite their stronger margins. Their net margins are 34% versus 17%, but they trade at 5.6x sales and a 1% free-cash-flow yield excluding stock compensation, against 2.3x and 3% for the rest. Half of an index-fund investment rides on those 30 stocks at the richest multiples in modern history. x.comÂ
The S&P 500 rally is a concentration bet because earnings growth is coming from very few companies, while AI productivity gains are not spreading across the broader economy. Nvidia and Micron drive 34% of expected Q3 earnings growth, and ten companies account for two-thirds. Apollo's revenue-per-worker chart shows gains for the Magnificent Seven but little for the other 493 S&P 500 companies; most stocks that reflect the broader economy are down. x.com x.com x.comÂ
Strong corporate profit margins may make the S&P 500 better value than traditional P/E ratios suggest, despite elevated stock prices. Per Bloomberg, its P/E-to-profitability ratio is at its lowest in nearly 14 years, last seen around 2012. Wall Street might be overlooking something important. x.comÂ
The AI-led S&P 500 peak will likely end somewhere between 2000 and the Nifty Fifty: painful, but not a 34-year Japan-style wait. Breadth is ugly, with record index highs while most stocks bleed; @RestlessCentaur notes over 70% of S&P 500 stocks are down more than 10%. Today's leaders trade around 30x forward earnings, while the 2000 and Japan tops were two to three times pricier. x.com x.com x.com x.com x.comÂ
Buying the S&P 500 as a whole is unappealing because the index forces owners to hold the bad with the good, despite Warren Buffett's long-standing advice to buy it. Plenty of its companies are speculatively valued with no margin of safety, lack predictable sales, earnings or cash-flow growth, or are stingy with dividends and buybacks. The index's initial agreement to immediately include SpaceX, which IPOs next week, makes it even less attractive; its last-minute reversal matters only so much. … Show more
S&P 500 earnings are keeping pace with prices, so this does not look like a bubble. Quarterly earnings are on track to grow 29.5%, more than twice the 10-year average of 12.6%, while the 18.7 forward P/E is just below its 19.1 decade average. x.comÂ
A strong S&P 500 is not a strong market: the index sits near highs while 55% of its members are below their 200-day average, the worst breadth in six months. The 10-year Treasury yield is at 5.16% and Japan's 30-year yield is at a record, the bill for the rally that remains open. Trading the leaders makes more sense than owning the average. x.comÂ
The cap-weighted S&P 500 remains exposed to tech and AI unwinding because technology still weighs more than at its 2000 peak. Its tech weight has slipped from a record 40% two weeks ago to 37.6%, but the 2000 peak was about 34%, making further unwinding most likely. x.comÂ
US large-cap equities do not look like a bubble at current forward valuations. The S&P 500 forward P/E is below both its five- and ten-year averages, while tech and momentum have suffered their worst five-month decline by far. x.comÂ
The S&P 500 rally depends heavily on a few stocks, leaving the broader US market exposed if those leaders correct. Ten stocks accounted for about 70% of its gains since March 30; Nvidia, Apple, Microsoft, Micron, AMD and Alphabet are among the largest drivers. x.comÂ