COVID-19 UPDATE: S&P 500 Mega-caps not a "bubble" as Top 5 earnings share = top 5 market cap share. San Diego CFA poll shows CFA holders bearish. Array ( [cookie] => 2eb997-b02d1e-552bd5-b56617-d58b40 [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 2 [max_usage_crypto] => 2 [lock] => 1 [message] => [error] => [active_member] => 1 [subscriber] => 0 [role] => fsi_macro [visitor_id] => 567899 [reason] => [method] => ) 1
Thursday was a rough day in the markets, with a fierce sell-off and S&P 500 down >1%. The carnage was in the mega-caps and there is a growing chorus that the S&P 500 is distorted by the outsized market cap of the Big 5 tech names. We have seen multiple citations of the "craziness" of this market as the top 5 are now 22% weight of the S&P 500. We discuss this at length below, but we just don't see the bubble. The top 5 stocks (AAPL, MSFT, AMZN, FB, GOOG) are 18% of earnings and like >80% of 2020 EPS growth. So, their 22% market cap share does not seem so out of line with their nearly 20% net income share. After all, aren't these franchise cos?
It looks like this is the week that definitely saw US case surge finally plateau (and hopefully turn into a decline this weekend). It looks like all the mitigation measures taken in the past few weeks are working. And the White House is now endorsing mask use. Thus, we see the economy risks diminishing.
And as we have commented in the past, as the national disease panic fades, local behavior recovers. In fact, our survey of San Diego CFA members conducted this evening (see the last bullet) shows how CFA members' perception of national trends governs their own personal decisions.
This is why we are not too alarmed at seeing economic data stall in the past week. Virus spread started accelerating in early June and the media and skeptics and policymakers have been quite alarmed -- appropriately, actually. But this had the effect of dampening economic momentum. If cases are now peaking, economic momentum will resume. And our policy strategist, Tom Block, expects a stimulus package passed and signed by early August.
Thus, the set up for stocks, in our view, is extremely attractive right now:
- disease is plateauing (again)
- economic momentum should recover
- fiscal stimulus coming
- sentiment remains very negative (see San Diego CFA survey below)
- $5T cash on sidelines
And many are ringing the bell (top of market).
STRATEGY: The Top 5 stocks earnings share = market cap share. Not a "bubble"
5 sentences on the reminisces of the 1999 dot-com bubble, my early career experience...
I was a wireless analyst in 1999, working at Salomon Brothers, which at that time, was the "firm" for wireless and telecom IPOs and investment banking. We had Jack Grubman running the Telecom group and he was a giant among short-statured telecom research franchises. So, suffice it to say, I was a ground zero witness to that dot-com bubble. The dot-com bubble fueled a "get rich quick" mentality as tech IPOs saw tremendous gains, any renaming to "internet" caused a surge and investors were funding and throwing money at any new telecom/internet idea. I don't have enough space in this daily commentary to describe the mania that was prevalent then, but one of the realities is this environment created a mismatching of pricing because:
- Companies that raised money in IPOs use that money to invest/fund/buy products from other start-up --> pyramid-like
- Venture funds were returning 100X-500X, so new funds were funded with massive profits from legacy funds --> pyramid-like
- Internet was growing so fast, but capital requirements so high, companies that were growing were losing tons of $$$ --> shift away from EPS
Bottom line - equity prices rose faster (straight up) than earnings (straight down). So, there was a growing and visible disconnect between asset prices and EPS. This was the bubble. If these dot-com companies were highly profitable, nobody would have called it a bubble.
Fast forward --> 2020. Those seeing "echoes of 1999"
Over the past few weeks, there has been a growing chorus of investors calling this equity market ultra concentrated, pointing to the outsized gains of the top 5 largest stocks in the S&P 500. In fact, even this morning, there were a few clients who shared with me this email from a broker. The message is all the same:
- the S&P 500 market is "unhealthy" because the top 5 stocks are too big
- many even point to this mirroring the 1999 "dot-com" bubble
Source: sell-side broker AM note
Top 5 "Market Cap share" about the same as "Earnings share"
Below is a comparison of the market cap of the top 5 largest stocks in the S&P 500 (AAPL, MSFT, AMZN, FB, GOOGL) and their corresponding earnings share:
- Market cap share is 22%
- EPS share is 18%
So, one can see the valuation of the top 5 is not necessarily distorted.
Become a Member To Access FS Insight Research
FS Insight gives individual investors access to Tom Lee's research, previously only available to banks and hedge funds.
|
|||
Join Now |
|
|||
Join Now |
What's included in your FSI Membership?
Thomas J. Lee
Head of Research
Type | Publication | Mon | Tue | Wed | Thu | Fri | Monthly | |
---|---|---|---|---|---|---|---|---|
Reports |
First Word The best market research out there -- on a near-daily basis. |
|||||||
Intraday Alerts These are released periodically after crucial market developments. |
Real-Time | |||||||
Weekly Roadmap Weekly summary of market events and updates on our key theses. |
||||||||
Webinars & Videos |
Macro Minute Video Daily video commentary on market conditions & key events. |
|||||||
Outlook Webinars We host over 12 LIVE webinars per year with our research team and high-profile special guests. Incredible value and market insights! |
Yearly | |||||||
Granny Shots Webinars | ||||||||
CEO Interview Webinars | Quarterly | |||||||
Appearances Archive | Real-Time | |||||||
Allocation Tools |
"Super Granny" Shots Stock List Granny Shots we expect to tactically outperform and underperform. |
|||||||
Granny Shots Stock List Thematic investment stock picks that aim to outperform the S&P 500. |
||||||||
Sector Allocation A sector allocation strategy that is designed to outperform the S&P 500 while taking minimal risk. |
||||||||
Market Alerts |
⚡️FlashInsights Real-time market commentary about macro and crypto events from our research heads. |
Real-Time |
Mark L. Newton
Head of Technical Strategy
Type | Publication | Mon | Tue | Wed | Thu | Fri | Monthly | |
---|---|---|---|---|---|---|---|---|
Reports |
Daily Technical Strategy Daily commentary on market trends and short term opportunities. |
|||||||
Weekly Roadmap Weekly summary of market events and updates on our key theses. |
||||||||
Webinars & Videos |
Daily Technical Strategy Daily commentary on market trends and short term opportunities. |
|||||||
Live Technical Analysis | ||||||||
Outlook Webinars We host over 12 LIVE webinars per year with our research team and high-profile special guests. Incredible value and market insights! |
Yearly | |||||||
Appearances Archive | Real-Time | |||||||
Allocation Tools |
Newton's Upticks Stock List Technically derived, intermediate-term picks of attractive risk/reward opportunities from the S&P 500. |
|||||||
Market Alerts |
⚡️FlashInsights Real-time market commentary about macro and crypto events from our research heads. |
L. Thomas Block
Washington Policy Strategy
Type | Publication | Mon | Tue | Wed | Thu | Fri | Monthly | |
---|---|---|---|---|---|---|---|---|
Reports |
US Policy Weekly update on developments in Washington DC and how they may impact Wall Street. |
|||||||
Weekly Roadmap Weekly summary of market events and updates on our key theses. |
||||||||
Market Alerts |
⚡️FlashInsights Real-time market commentary about macro and crypto events from our research heads. |
Real-Time |
Sean Farrell & Crypto Team
Type | Publication | Mon | Tue | Wed | Thu | Fri | Monthly | |
---|---|---|---|---|---|---|---|---|
Reports |
Market Update Stay on top of the crypto markets with macro commentary, technical analysis, and the most relevant news. |
|||||||
Weekly Strategy Weekly summary of market events and updates on our key theses. |
||||||||
Funding Fridays Are you looking for investment opportunities in the crypto space? We explore early-stage crypto opportunities in this note about where the smart money is being invested! |
||||||||
Crypto Concepts We periodically provide in-depth research on the leading protocols, companies, and funds shaping the crypto ecosystem. |
||||||||
Liquid Ventures A recurring research note focused on delivering unique insights into high-risk investment opportunities within the crypto ecosystem, primarily centered on early-stage or small-cap tokens. |
||||||||
Deep Research We periodically provide in-depth research on the leading protocols, companies, and funds shaping the crypto ecosystem. |
Quarterly | |||||||
Weekly Roadmap Weekly summary of market events and updates on our key theses. |
||||||||
Webinars & Videos |
Outlook Webinars Ongoing webinars exploring crypto opportunities, in depth research, and exclusive research offerings from our team of analysts and leading cryptocurrency firms. |
Yearly | ||||||
Crypto Comments |
Daily Technical Strategy From Bitcoin, Ethereum and Solana to other coins, our Head of Technical Strategy highlights important price movement to help give you an edge. |
|||||||
Allocation Tools |
Crypto Core Strategy A powerful tool designed to help crypto investors build a crypto portfolio that outperforms the industry’s king – bitcoin – regardless of market conditions. |
|||||||
Market Alerts |
⚡️FlashInsights Real-time market commentary about macro and crypto events from our research heads. |
Real-Time |
FS Insight Research Team
Type | Publication | Mon | Tue | Wed | Thu | Fri | Monthly | |
---|---|---|---|---|---|---|---|---|
Reports | First to Market | |||||||
*Earnings Daily This note provides investors with a myriad of useful metrics to measure the progress of earnings season |
||||||||
Signal From Noise Highlights timely market themes and sectors with corresponding stocks, cutting through the day-to-day market “noise” for a distinct perspective. |
||||||||
Community Questions We gather your inquiries and answer them in the most scalable way. Hear directly from our research principals! |
||||||||
FS Insight Academy Our main goal is to make you a better investor! This series will guide you through key financial concepts and topics in an understandable way. |
||||||||
Webinars & Videos |
Free Macro Webinars Live webinars and Q&A with our research team and high-profile industry leaders. |
Quarterly | ||||||
Free Crypto Webinars Live webinars and Q&A with our research team and high-profile industry leaders. |
Quarterly |
*Daily reporting during each quarterly earnings season.