All-Time
Highs, All-Time Multiples: The Rally That Keeps Discounting Every Obstacle
By the Curmudgeon
The Week in Review:
The seemingly unstoppable
U.S. stock market rallied again last week, despite numerous headwinds which
included: increased tariffs going into effect, Trump’s threat of 100% tariffs
on imported semiconductors, increased tech
sector layoffs (46,356 in July), and weaker than expected demand at auctions for U.S.
Treasury securities.
One bright spot has been
better than expected corporate earnings (more below).
Here’s the weekly scorecard
(Source: MarketWatch):
l Nasdaq Composite: +3.9%, closing at a
record high of 21,450.
l S&P 500: +2.43%, closing at
6,389.5, just below its record high set less than two weeks ago.
l Russell 2000: gained 51.64 points,
for a weekly increase of 2.23%.
l Dow Jones Industrial Average closed
at 44,175.61 for a weekly rise of 1.4%.
Corporate Earnings Have
Been Strong:
A bullish driver for stock
prices recently has been better than expected corporate earnings. As of early
August, about two-thirds of companies had reported results with 82% beating
Earnings-per-Share (EPS) expectations—well above the 5- and 10-year averages of
78% and 75%, respectively. Revenue results were similarly strong, with 79% of
companies exceeding estimates, marking the best revenue surprise rate since Q2
2021. The blended year-over-year earnings growth rate for the quarter came in at 10.3%, a sharp improvement from the 4.9%
projected at the start of the quarter. Revenue growth also accelerated to 6.0%,
up from a 4.2% forecast. Source:
FactSet.
However, it is FUTURE
earnings that supposedly drive stock prices and those are likely to decline
as the U.S. and global economy slow. Many analysts are skeptical of the stock
market continuing to be a “discounting mechanism.” Are you?
Complacency Reigns
Supreme as Valuations Soar:
The equity and junk bond
markets don’t seem to care anymore about tariffs, as they did right
after the April 3rd “Liberation Day” waterfall decline
commenced. Equity markets ignored any
impact from increased U.S. tariffs on goods from numerous trading partners that
went into effect on August 7th.
That puts the average effective U.S. tariff rate at 18.6% -- the
highest since 1933. This escalation has led to warnings of price increases for
consumers and potential negative impacts on economic growth and corporate
earnings.
-->The Curmudgeon
wonders how this very same April crash causer turned into a no longer relevant
risk factor for the markets. What, me worry?
l The CBOE Volatility Index (VIX) “fear
gauge” was down -8.57% on Friday to close at 15.15 - just a few ticks above its
YTD low of 14.93 on July 24, 2025. That
low print shows absolutely no fear of declines in risk assets.
l Junk bond credit spreads over Treasuries continue to contract
with high yield bond prices rising as long-term U.S. Treasury prices were
falling - the JNK ETF closed Friday at 96.72 or +0.2%, while the TLT ETF was at
87.29 or -0.43% loss for the day.
l High levels of margin debt
further suggest investor confidence, with the latest figures exceeding $1.008
trillion - up +24.5% from one year ago.
l Continued talk about how the AI
revolution is creating a new paradigm and ushering in a “new era.”
Also, quotes like: "this time it's REALLY different, valuations don’t
matter, buy the dip, there are oceans of cash on the sidelines,” etc.
Meanwhile, valuations
are truly off the charts, especially for mega cap tech stocks. Has
any set of large cap stocks EVER sold for ~9.5X revenues before? Well,
that’s the case now for the biggest market caps! Here’s the math:
-Market Cap: Nvidia: $4.41 trillion, Microsoft: $3.90 trillion,
Apple: $3.27 trillion, Amazon: $2.40 trillion, Alphabet (Google): $2.21
trillion.
-Approximate annual
revenues: Amazon: $591 billion,
Apple: $394.33 billion, Alphabet: $350 billion Microsoft: $245 billion Nvidia:
$131 billion.
-Dividing the combined
market cap by the combined revenue:
$16.19T / $1.711T ≈ 9.46. Note we
didn’t include Meta Platforms, which has a market cap of $1.93T.
"With retail investors
aggressively buying the dip, the most speculative sectors didn't just climb the
“wall of worry” – they catapulted over it. Unprofitable tech, meme stocks, and
bitcoin-sensitive stocks surged approximately 55-115% in just fifteen weeks.
Animal spirits are roaring, and strong momentum has pushed both valuations and
signs of speculation to risky levels."
Can Anything Stop the
Stock Market?
The Atlantic
magazine this month asks: “Does the Stock Market Know Something We Don’t?”
“The uncomfortable fact about
its historic run is that no one is sure why it’s happening—or what could bring
it to an end. As the stock market soars ever higher, the theories of why it
rises have suffered the opposite fate. One by one, every favored explanation of
what could be going on has been undermined by world events."
To some experts, the
situation has all the markings of a speculative bubble. In a
recent blog post, Torsten Sløk, the chief economist at the asset-management
firm Apollo, noted that the top 10 companies in the S&P 500 today are more
overvalued—meaning their stock prices exceed their earnings by larger
amounts—than the top 10 companies were at the height of the 1990s dot-com
bubble. More
on this topic here.
Note: Data as of July 2025. Top 10
companies are by market cap. Sources: Bloomberg, Apollo Chief Economist
OpenAI as the Poster
Child for Highly Valued Private AI Companies:
OpenAI, the inventor of Chat GPT, raised another $8.3
billion last week in a massively over-subscribed funding round. It included
$2.8 billion from Dragoneer Investment Group, a San
Francisco-based technology-focused fund. Leading VCs that also participated in
the funding round included Founders Fund, Sequoia Capital, Andreessen Horowitz,
Coatue Management, Altimeter Capital, D1 Capital Partners, Tiger Global and
Thrive Capital, according to the people with knowledge of the deal.
The oversubscribed funding
round came months ahead of schedule. OpenAI initially raised $2.5 billion from
VC firms in March when it announced its intention to raise $40 billion in a
round spearheaded by SoftBank. The Chat
GPT maker is now valued at $300 billion, despite losing tons of money.
Reuters
reported on Wednesday that OpenAI is
in early-stage discussions about a stock sale that would allow employees to
cash out and could value the company at about $500 billion, a source
familiar with the matter said. The
transaction, which would come before a potential IPO, would allow
current and former employees to sell several billion dollars
worth of shares, said the source, who requested anonymity because the
talks are private.
Prudence Punished by Investors:
The
Financial Times (FT) notes that Berkshire Hathaway’s class A shares
have tumbled over 14% since May 2nd, the last trading day before CEO
Warren Buffett said he would hand control of Berkshire to top executive Greg
Abel.
Berkshire’s slide contrasts with a rally in the
S&P 500 of 15.7% since May 2nd, not including dividends. The lag
to the S&P 500 is among the largest Berkshire has suffered over any
three-month period stretching back to 1990, according to an analysis by FT.
The selling over the past three months has
materialized even as Berkshire continued to report
healthy operating results across its businesses, with the BNSF railroad, its
handful of utilities and manufacturing, service and retailing
divisions all reporting profit growth in the second quarter.
The likely reason for Berkshire’s under performance is
the company’s huge cash hoard of ~$344 billion, as per Berkshire’s June 30th financial
report. That’s the largest ever in
both absolute terms and also as a percent
of total assets. Berkshire's large cash pile reflects Buffet’s caution about
deploying capital into new investments given the current uncertain economic
outlook, speculative market conditions and ultra-high valuations.
Indeed, Buffett has been taking chips off the table
for a very long time. Last year he sold a large portion of the company’s
investment in Apple and Berkshire has now been a net seller of stocks for 11
consecutive quarters, pushing its cash levels to over 30% of total assets
as of June 30th.
“In other periods of market exuberance, notably the
dot-com bubble in 1999, Buffett sat on the sidelines. While that generated
opprobrium from critics at the time, with Berkshire shares lagging the
technology-heavy Nasdaq Composite, the ensuing correction underscored his
investment bona fides.”
Quotes to Ponder:
“No man ever steps in the same river twice, for it's
not the same river and he's not the same man.”
“Everything flows and nothing abides. Everything gives
way and nothing stays fixed.”
Heraclitus
of Ephesus was a pre-Socratic Greek philosopher known for his theory of
universal flux and the unity of opposites.
.…………………………………………………………………………………………………………
Wishing
you good health, success and good luck. Till next time…
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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