The broad market (S&P 500) is trading at the highest forward PE multiples since November 1999, but the financial press is rife with mendacious piffle claiming there is no bubble. For example, in celebration of Tuesday’s all-time high on the S&P 500, one James Mackintosh of the Wall Street Journal minced no words:
Except, the Everything Bubble is in the imagination of the many investors complaining about it. First, it isn’t everything. Second, it isn’t a bubble….
Right. Supposedly, the above statement is true because energy sector stock prices are in the tank, but the market is being rationally led by the tech giants where allegedly solid prospects for earnings growth are being rewarded with higher PE multiples owing to ultra-low interest rates.
…. Lower rates mean profits further in the future matter more to the share price, so companies with steady earnings no matter what the economy does are worth more. Those that are sensitive to the economy are worth less, because future earnings are expected to be hit. Growth stocks do incredibly well, because their future earnings are expected to be higher and, at least for those thought immune to economic weakness, worth more as well thanks to lower rates. Groupthink: A Study in... Booker, Christopher Best Price: $15.56 Buy New $15.58 (as of 04:01 EDT - Details)
Apply this framework and there’s no bubble. U.S. stocks are more highly valued than in the past because they are dominated by big growth stocks, themselves justifiably more highly valued thanks to low rates.
The sheer laziness and conformism of today’s so-called financial journalists is a wonder to behold. When the leader of the tech growth stocks, Apple, crossed the $2 trillion market cap barrier for the first time today, thereby embodying more market cap than the entire Russell 2000 of small cap US companies, Mackintosh’s colleague at the Wall Street Journal spewed the same groupthink:
The stock has more than doubled from its March 23 low, boosted by steady demand for the company’s devices and better-than-feared results in its core iPhone business as millions of Americans work from home.
Steady sales growth is driving the string of achievements. Apple’s sales rose to $260 billion in the fiscal year ended in September from $216 billion three years prior. The company has even grown sales during the pandemic: For the quarter ended in June, they rose 11% from a year earlier to nearly $60 billion, exceeding Wall Street expectations. Earnings surged to $11.25 billion.
Apple is not a growth stock. Period.
The three-year sales gain cited by the WSJ amounted to only 6.4% per annum, but also reflects what amounts to journalistic malpractice.
Groupthink in Science:... Best Price: $117.75 Buy New $65.19 (as of 04:01 EDT - Details) That’s because the starting figure of $216 billion for Apple’s FY 2016 sales actually reflected a 7.8% decline from sales of $234 billion in FY 2015. So the four-years growth rate of sales through FY 2019 was, well, a mere 2.67% per annum.
Likewise, the 11% sales gain during the June 2020 quarter versus prior year is completely misleading. During the past four quarters, the year-over-year sales gains have been all over the lot, posting at 10.9%, 1.0%, 8.8% and 1.8% respectively. Accordingly, for the LTM period ended in June, the sales gain was just 5.7% – hardly a barn-burning growth figure.
Likewise, the purported June quarter earnings “surge” to $11.25 billion was nothing of the kind. During the 2018 June quarter, for instance, net income posted higher at $11.52 billion. The surging at issue, therefore, was one of backward motion.
In fact, the only thing about Apple which has been in a growth mode during the last five years is the company’s PE multiple, which has essentially doubled from 14X to 35X at today’s record share price.
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