Chart-o-Rama Depicts Severe Systemic Risk for U.S.
Equities
By the Curmudgeon
Introduction:
Weve said it all time and
again: there are multiple egregious risks for U.S. equites that have been
largely ignored.
As we believe a picture
is worth a thousand words, weve restricting this post to a collection of
eye-popping charts which highlight stupendous risk for stocks, especially the highflyers.
Weve included explanatory notes for clarification where needed. So now we will
let the charts speak for themselves:
Possible Supply/Demand
Imbalance for Equities:
Fed data show that net
equity issuance by nonfinancial firms turned positive
in Q1, ending a multi-year buyback deficit. That reversal occurred before
massive new IPOs BEFORE the $86B SpaceX IPO. Institutional cash is being
diverted from buying stocks to absorbing expensive IPOs (with Anthropic and
Open AI to come) as well as secondary offerings from Alphabets planned $85B
offering and others.
.
Mania in Semiconductor
Stocks:
SOX is the ticker symbol
for the PHLX Semiconductor Index (formerly the Philadelphia Semiconductor
Index). It tracks the performance of the 30 largest semiconductor companies,
including chip designers, manufacturers, and equipment suppliers. Intels chart is even more insane with a
500+% gain!
AI Bubble:
It seems inconceivable
that private AI companies, like Anthropic and Open AI, have assessed valuation
of ~$1 Trillion each. Thats despite the fact they
have no earnings and likely wont be profitable for several years.
Also, the increased
earnings forecasts for big tech/AI names are fake.
1.
Hyperscalers
earnings growth this quarter was boosted by an unusually large contribution
from other income, which was actually mark-ups of
their equity stakes in private Gen AI companies.
2.
Also,
the forecast earnings increases are largely based on circular funding deals,
many of which are debt related (e.g. Oracle and Open AI). Please refer to this IEEE Techblog
post for details and discussion:
Investechs
Artificial Intelligence Index (AI) is made up of
AI-heavy stocks that are representative of investor sentiment -and the
potential asset bubble- surrounding the AI phenomenon.
Margin Debt: Its crucially important
to understand that margin works both ways- it propels stocks higher during upswings, but causes mass liquidations (due to margin calls)
during selloffs, corrections and bear markets.
U.S. margin debt YoY
growth has surged to ~55%, near the highest level since the 2021 peak,
according to Topdown Charts analysis.
This comes as U.S. margin debt spiked another +$112 billion last month, to a
record $1.4 trillion, more than DOUBLING since 2023.
Historically, such rapid
surges in margin debt have preceded major bear markets. Margin debt growth
peaked in March 2000, just months before the Dot-Com collapse, and in July
2007, 3 months before the S&P 500 topped out ahead of the Financial Crisis. It also peaked in
early 2021, just before a sharp market correction later that year. In each of
the prior three instances, the market took several months to actually
top out after this signal first flashed, but the warning itself has
historically proven reliable.
.
U.S. Household Ownership
of Stock at All-Time High:
Where is the buying power
going to come from with the public maxed out on stocks as a percent of their
total financial assets?
..
U.S. Equity Valuations:
Weve highlighted sky high
valuations for years, but it seems theres no upper bound? The U.S. stock market has reached an all-time
high across multiple valuation metrics, P/E, forward P/E, Shiller P/E,
price-to-book, price-to-sales, EV/EBITDA, Q ratio, and return on equity,
surpassing peaks from 1929 and the 2000 dot-com bubble. The composite valuation
percentile now sits at the highest level in recorded history. Extreme
valuations at this level have historically preceded extended periods of equity
underperformance, signaling elevated risk and potential mean-reversion pressure
ahead.
.
See this post for and explanation of the Buffet Indicator which is also at
an all-time high and almost double what it was at the Dot Com bubble peak:
Equity Risk Premium and
Excess CAPE Yield:
1. Observe the narrow gap between the S&P
500s earnings yieldthe inverse of its P/E ratio, expressed as a
percentageand the yield on 10-year U.S. Treasury Note. We noted in the
previously referenced Curmudgeon post that this equity risk premium is
way below its long-term norm of roughly 5%, leaving equities appearing very
expensive both on an absolute basis and relative to fixed income.
The trailing 52-week P/E
ratio of the S&P 500 is ~25.11 so the reciprocal earnings yield is ~3.98%
while the U.S. 10-year yield is now ~ 4.5%. That translates into a negative
equity risk premium of -0.58%.
2. Cyclically Adjusted
Price-to-Earnings (CAPE) is calculated based on the average of 10 years of
inflation-adjusted earnings.
The so-called Excess
CAPE Yielda measure of that gap that accounts for inflationis at around
1.3%, near its lowest level of the past decade.
JP Morgans models say that equities look
rather expensive--on an outright basis relative to the norms of the past 30
years. And equities currently look
even more expensive relative to bonds, according to the investment bank. Heres
yet another chart to confirm that statement:
..
From Investech
Research:
Housing Starts fell -15.4%
in the latest reading (May 2026) following an -8.5% decline in April 2026. After remaining in a relatively narrow range
for the last few years, this release signals a major break to a new 6-year low.
Housing Starts are an
important measure of housing market health, as they indicate the future supply
of homes that will be available to buyers. In addition, a decrease of this
magnitude signals a likely decline in construction and manufacturing jobs and a
further slowdown in housing activity across the board.
The housing market has
been largely stagnant for the last few years and this recent drop in Housing
Starts warns that the sector could be heading for further trouble.
We conclude with a chart
from Tom
McClellan on X:
A pattern of 15 good
stock market years (white portion of the box) followed by 15 years when you had
better be a market timer (yellow portion) has worked all the way back to the
1830s. The next yellow box starts about
now.
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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