NVIDIA moves to new highs, while nearly half of major US companies have no earnings

How much “over-valuation” can one have in stock markets? The chart, based on Nobel Prize winner Prof Robert Shiller’s CAPE Index, suggests you can have a lot, if central banks really try hard:

• The Price/Earnings ratio is the most important index in stock markets, and Shiller’s CAPE Index averages this over a 10-year period to give an underlying trend
• It first peaked in September 1929 at a then-astonishing 33 ratio, after which the stock market collapsed 85% by June 1932, leading to the Depression

Memories were so strong that it took 71 years for a new peak ratio to occur – 44x during the dotcom bubble.

And then the market collapsed 48% by March 2009, despite central banks creating a new subprime bubble on the way, as the chart shows.

CENTRAL BANKS HAVE CREATED THE BIGGEST BUBBLE IN HISTORY 

Since 2023, Western central banks have created $25tn of dept; China has created $50tn

As the charts show, “nothing succeeds like excess”. And since 2003, western central banks combined to flood markets with $25tn of stimulus.

China added $56tn to create the biggest property bubble in history. But this bubble is now bursting. House prices are falling and major debt refinancing is now underway to rescue local governments. They had relied on land sales for income. And now they can’t pay their bills, as Bloomberg reports:

“Record Defaults Hit $800 Billion Chinese Local Debt Market”

EVERY BUBBLE HAS A ‘NO-BRAINER’ STOCK – IT WAS CISCO, NOW ITS NVIDIA

CISCO 1990 – 2002, NVIDIA 2014 – 2024

Meanwhile the US stock market is happily replicating the dotcom bubble, as the chart shows:

• In that bubble, Cisco was the “no-brainer stock”,rising from 15c at its debut to peak at $79 in March 2000. It then collapsed to $9 in September 2002
• Today’s bubble is focused on NVIDIA. It was just 40c as recently as October 2014 and has now reached $140, as investors continue to panic buy

At its peak, Cisco’s market value was 5.5% of US GDP. NVIDIA has done even better – it was 11.5% of US GDP in June, and higher still today.

NVIDIA IS NOW ‘CARRYING’ GLOBAL MARKETS

Global equity returns are basically all about NVIDIA

In fact, NVIDIA is doing much better in the over-valuation stakes, as the Apollo chart shows. Apollo warns:

“NVIDIA is now bigger than the total market cap of five of the G7 countries. And foreigners own 18% of the US stock market.

“The bottom line is that global equity markets, including retirement allocations to equities, are basically leveraged to NVIDIA.

“Let’s hope the value of NVIDIA doesn’t decline significantly. The idea that public markets are safe and retirement savings in public markets are safe is misguided. Some investments in public markets are safe, and some are risky.”

VALUATIONS ARE AT EXTREME LEVELS

Market cap of the largest stock relative to the 75th percentile stock (left axis)

S&P 500 Forward Price-to-Sales Ratio

Other valuation metrics tell a similar story:

• Goldman Sachs suggests the market is at the most concentrated level since 1932. The Top 10 stocks are now 37% of the S&P 500
• Factset data shows the market is trading at the highest Price/Sales ratio since the dotcom bubble, at 2.7x

NEARLY HALF OF RUSSELL 2000 COMPANIES HAVE NO EARNINGS

The share of Russell 2000 companies with negative earnings continues to rise

Valuation doesn’t matter to most investors when stocks are rising. Their response is often very simple, “Be happy, staying poor”. But all investors should keep a close eye on earnings.

New companies are often unprofitable as they invest to build the business. But established companies with no earnings generally go bust.

The problem is that this didn’t happen during the stimulus bubble. Instead, companies became zombies – they simply refinanced at low interest rates and carried on.

But the world has now changed. And so the chart of Russell 2000 earnings is very worrying. This covers most major US companies and shows nearly half now have no earnings. As Apollo warns:

“Companies with no earnings, weak revenues, and weak cash flows underperform when interest rates stay higher for longer because they are not able to pay their higher debt servicing costs”.

MARKET INTEREST RATES HAVE RISEN SINCE THE FED CUT ITS RATE

This is what is happening today. After 20 years of stimulus, central banks are finally admitting defeat. And markets are starting to rediscover their core role of price discovery.

The US Federal Reserve cut the Fed Funds rate by 0.5% on September 18. Since then, market 10-year Treasury rates have risen by 0.5%.

Of course, this doesn’t mean that global speculators will stop chasing NVIDIA’s stock higher in the short term.

But it does mean that the clock is probably now ticking for the biggest stock market bubble of our lifetimes.