U.S. corporate performance period this week ushered in the peak, there will be 181 or more than 1/3 of the S&P component companies to disclose the latest quarterly results, compared with the same period last year, earnings are expected to record significant growth. However, as the S&P has rebounded significantly from the bottom of last year, there are four indicators show that the valuation of U.S. stocks has been too high, once the results or outlook slightly “wrong”, ready to trigger a major adjustment, early fulfillment of the “May sell goods” (Sell in May) said.
According to FactSet estimates, the S&P component companies in the first quarter earnings are expected to rise 33.8% year-on-year, the potential of the strongest since the third quarter of 2010, mainly due to the outbreak of the epidemic last year impact on various industries, resulting in a low base of comparison, the period revenue is expected to rise 7.5%. Therefore, for the market, this quarterly performance is more important not to compare with the same period last year, but with the fourth quarter of last year, as more reflective of the economic recovery since the performance of enterprises. Even if the results of the Office, but also pay attention to the corporate assessment of earnings prospects, especially the impact of commodity price increases, supply chain issues and other cost factors.
This week’s results include a host of tech giants such as Apple Inc., Microsoft, Amazon and Facebook (Fb), as well as electric car maker Tesla. It is no coincidence that these companies are hot stocks, in addition to performance, if the U.S. President Joe Biden to implement tax increases, fear will be the first to be put. Individually, Tesla shares have a good chance of adjusting downward, regardless of good or bad results, because the company is plagued by safety issues, as well as complaints from users in China and other controversies. As for Apple, Fb and Microsoft recorded record earnings or revenue in the fourth quarter of last year, it is difficult to have a surprise in the face of a higher base of comparison.
Worryingly, the valuation of U.S. stocks is too expensive, the adjustment is only a matter of time. First of all, by the Nobel Prize in economics developed by the Chairman Le cycle-adjusted price-to-earnings ratio (CAPE) shows that the S&P index last Wednesday CAPE of 37.49 times, is more than double the average since 1870 16.81 times. And the four previous times the indicator stayed above 30 times were when the Great Depression, the dot-com bubble, the fourth quarter of 2018, and the stock market crash triggered by the new crown pneumonia (a Chinese Communist virus), with the S&P falling between 20 and 89% thereafter. While the likelihood of a repeat of the 89% plunge in the stock market is very low with the Federal Reserve and government underwater, a double-digit decline is not surprising.
The second is the S&P price-to-sales ratio (price-to-sales ratio), which stood at 3.06 times as of last Wednesday, the highest in at least 21 years; from 2000 to 2017, the indicator did not exceed 2 times in one year, while since the end of 2018, the indicator has risen by 64%. The third is the S&P price-to-book ratio (price-to-book ratio), which reached 4.5 times last week, approaching the century’s highest record of 5.06 set in March 2000, when it was the peak of the dot-com bubble, while the S&P price-to-book ratio of the past 21 years averaged only 2.87 times. Although the current technology stocks are much more robust, but the last time the P/B ratio touched this high, the S&P index then plunged about 50%, so it is worth warning.
The fourth is the S&P yield (Earnings Yield), an average of 7.31% since 1870, usually much higher than bond yields, but as of last Wednesday, the indicator is only 2.35%, almost equal to the 30-year U.S. bond yield of 2.26%.
U.S. stocks have seen 38 declines of at least 10% in 1950, with double-digit declines occurring every 1.87 years on average, and now more than 1.1 years have passed since last year’s bottom. Although the average time is only a reference, but shows that the adjustment and decline in the market is inevitable, investors need to be alert to the huge corporate performance, Biden tax increases and the Federal Reserve Board of Governors meeting rates will become an excuse to ship.
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