My next few commentaries will be a retirement planning series, but I wanted to do one last market-related commentary before that as I’ve been getting questions about Nvidia and other tech stocks from a few clients.

I was also asked by another person in response to my last market commentary on market valuations something along the lines of, “What’s the point? What am I supposed to take away from it?”

The point is to educate and refocus our attention on what we’re trying to do because CNBC / media, friends, financial salespeople, etc… don’t know anything about our unique financial circumstances or the blueprint we’ve built for our financial future.

And what are we trying to do? Maximize our probability of achieving and remaining financially independent for the rest of our lives in the face of various market and economic environments.

The purpose of these market commentaries is to educate and to refocus our attention back to the big picture and away from the shiny object du jour.

It’s easy to get distracted from the big picture because the big picture isn’t necessarily “sexy” or exciting or interesting like chasing a hot asset can be. As long-term investors trying to secure our financial futures we must comprehend the concept of risk / reward which also inherently implies an understanding of asset valuations. And risk / reward doesn’t always refer to simply the risk of dollars lost versus risk of dollars gained per se but, more importantly, the risk of financial anxiety / dependence versus the reward of financial freedom.

 

For those longtime readers of my commentaries, you might remember when I would write about Tesla (and electric vehicle industry more broadly). I was describing how the price of these stocks could not be justified as the sales growth and earnings ultimately required were pie-in-the-sky delusions without any grounding in reality.

Sure enough, that EV bubble popped as the stocks of the EV manufacturers / infrastructure have struggled tremendously the last few years as the unrealistic sales and earnings projections failed to materialize.

Manias can lead to extremely irrational behavior, dangerous performance chasing, delusions, and asset mispricing. This is not a new phenomenon…it’s happened for centuries around the world over and over again.

I’ve shared a few charts of once hot EV manufacturers below to clearly illustrate…

NIO chart

 

 

Chart of Rivian stock price

 

Chart of Lucid stock price

 

But we’re not here today to talk about EV. I’m here today simply to address the extreme concentration of value within a few companies in the market today.

In fact, the five largest companies within the S&P 500 Index make up about almost 30% of the index’s total market cap!

The “Magnificent Seven” (Mag 7) stocks were responsible for over half of the stock market’s gains in 2023!

 

Below I share a historical chart from Morgan Stanley showing Stock Market Concentration of the Top 1, Top 3 and Top 10 stocks between 1950-2023 to illustrate the extremity and rarity of the current condition. This condition has become even more extreme in 2024.

 

The three largest, Nvidia, Microsoft and Apple, combine for a total market cap of $9.5 trillion!

Nvidia is valued at ~40x sales, Microsoft is valued at 14x sales, and Apple valued at 9x sales. The S&P 500 broadly is priced at around 2.5x sales and that’s an extreme level relative to its history.

Nvidia’s market cap sits at around $3.2 trillion. It first reached $1 trillion around June 2023, $2 trillion in March 2024 and $3 trillion just a few months after that in June of 2024 (notice the exponential rise).

Nvidia Market Cap

 

Nvidia’s TTM sales are about $80 billion. So if they can double those sales three times to $640 billion (almost double Apple’s TTM revenues), Nvidia’s price-to-sales multiple will be about 5x assuming no further stock price appreciation, which is still a very high multiple.

No doubt sales can keep growing at a rapid pace but to think sales growth can continue at the current pace indefinitely is exactly the type of delusional thinking that got late-entry Tesla stock investors in trouble. There’s a point where markets get saturated, competition increases, etc… and sales growth slows down.

Mr. Christopher Bloomstran put it this way on X, “This is the goofiest and likely most dangerous concentration of overvaluation I’ve seen in 34 years investing and throughout financial history…

Mr. Market is very good at rewarding business success but to a fault. In the short term, stocks can trade at extremes relative to fundamentals, both on the low side and the HIGH side. At 23x 2024 expected earnings, the market-cap weighted S&P 500 is froth with excess and in my judgment uninvestable. Under the hood, the majority of stocks are not overvalued. The bifurcation between the dear and the cheap reminds me of March 2000. From that point the index has returned 7% per year, spending much of the subsequent decade in the red. You can have extremes of over or undervaluation in the short and even intermediate terms. But in the long run, Mr. Market gets it right.”

I agree that ultimately, Mr. Market gets it right. Certain economic laws must hold over time. A company’s stock price, for example, cannot become permanently dislocated from its underlying cash flows.

 

 

Disclosures:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.

This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.

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