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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.

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 a



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

...

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