The Week in Charts (6/23/24)

By Charlie Bilello

23 Jun 2024


View the video of this post here.


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The most important charts and themes in markets and investing

1) A New King Is Crowned

10 years ago Nvidia had a market cap of $10 billion.

After a 300x increase, it is now valued at an astounding $3.33 trillion.

This week, Nvidia surpassed Apple and Microsoft to become the largest company in the world, proving once again that there is no impossible in markets.

How long will Nvidia remain the king?

That largely depends on whether it can continue to grow at a rapid pace while maintaining its record profit margins.

With net income of $43 billion versus $86 billion for Microsoft and $100 billion for Apple, investors are clearly expecting significant growth in the years to come. And with profit margins of 53% versus 36% for Microsoft and 26% for Apple, investors are also betting that Nvidia will stay far ahead of the competition.

The stock now trades at over 21x forward sales, up from 12x two months ago. This is a significant premium over Microsoft (12x) and Apple (8x).

Which means that we’re seeing an increasing gap between Nvidia’s stock performance and its underlying fundamentals. The 174% year-to-date gain for Nvidia exceeds its expected revenue growth for the entire year (98%) by a wide margin.

2) The Running of the Bulls

Nvidia’s epic run and exuberance over the promise of AI continues to be the dominant narrative in markets.

The S&P 500 closed at its 31st all-time high of the year this week, on pace for one of its best years ever.

It also crossed above 5,500 for the first time, just 8 days after hitting 5,400. This was the 7th 100-point milestone of the year for the index.

The S&P 500 is up 15% in the first 117 trading days of 2024. Over the last 25 years, only 2019 had a better start. This remains the best start to a presidential election year in history.

As one might expect, sentiment is getting a bit frothy again, with the percentage of Bulls in the Investors Intelligence survey moving up to 61%.

That’s in the top 5% of historical readings, after which you tend to see below-average forward returns.

3) Partying Like It’s 1999/2000

Speaking of froth, US large cap growth investors are partying like its 1999 or 2000.

But a rising tide has not lifted all boats, with small cap stocks ($IJR) down 2% on the year while large caps ($SPY) are up 15%.

The biggest US companies have been dominating the equity market for well over a decade. As a result, the outperformance of US large caps (S&P 500) over small caps (Russell 2000) is now at its most extreme level since November 24, 1999.

What happened in the 7 years following the 1999 extreme? Reversion to the mean. Small caps would outperform large caps by a wide margin, with the Russell 2000 gaining 90% versus an 11% gain for the S&P 500.

The market cap-weighted S&P 500 is outperforming the equal weight index by nearly 10% this year, following 12% outperformance in 2023. Since 1971, the only back-to-back years with a higher combined outperformance: 1998-1999.

Growth’s outperformance versus Value is now at its highest level since 2000 and not far from the record high in March 2000. What happened in the 7 years following July 2000? Reversion to the mean. Growth stocks declined 27% while Value stocks gained 84%.

US stocks have been outperforming international stocks for 16 years running, and by a huge margin. The result: we’re now 3 standard deviations above the mean in terms of historical US outperformance, a record high.

4) The Mega Cap Premium

Driven by the outsized gains from the largest US companies, we’re now seeing a wide dispersion in the valuations across the S&P 500.

The 50 largest companies in the index are trading at 5.6x sales while the 50 smallest are trading at 1.6x sales (median values).

The huge gains in big tech this year have pushed the median price to sales ratio in the Nasdaq 100 up to 6.5x, the highest level since March 2022.

The S&P 500’s P/E ratio moved above 25 this week, which is the highest we’ve seen since the first quarter of 2021 and 35% above the median P/E ratio since 1988 (18.5).

5) Consumer Weakness or Consumer Strength?

Depending on which data point you look at, the US consumer is either exhibiting weakness or strength.

  • Evidence of weakness: US Retail Sales increased 2% over the last year but after adjusting for higher prices they were down 1.2%. Both of these numbers came in well below the historical averages of +4.6% nominal and +2.0% real.
  • Evidence of strength: Americans continue to spend money on big vacations, with flights to Europe hitting record highs, up 8% year-over-year. This surge is helping to boost the economies of southern Europe (Portugal/Italy/Greece/Spain).

6) Hit by Higher Rates

High financing costs and high mortgage rates continue to take a toll on homebuilders and potential buyers:

  • The US Housing Market Index (a measure of homebuilder confidence) has moved down to 43, its lowest level of the year. 29% of builders cut home prices to boost sales in June, the highest share since January.
  • US Housing Starts hit a 47-month low in May, down 19% YoY.
  • US Existing Home Sales fell 3% over the last year, the 33rd consecutive YoY decline. That’s the longest down streak in activity since 2006-2009.

7) High Mortgage Rates + Record High Prices = Very Low Affordability

4 years ago the 30-year mortgage rate was 3.1% in the US and the median existing home price was $284,000.

Today, the 30-year mortgage rate is 6.9% and the median home price has moved up to a record $419,000.

The result: a $27,000 increase in the required down payment (assuming 20% down) and a 128% increase in the monthly mortgage payment (from $970 to $2,208).

This continues to be the least affordable housing market in history.

8) Housing Supply: Slowly Rising

What would help put a cap on further price increases in the housing market? More supply.

On that front, we’re seeing a slow but meaningful improvement:

  • The months’ supply of existing homes moved up to 3.7 in May, the highest since June 2020.
  • Active listings of homes for sale are up 16% year-over-year to their highest levels since 2022.

9) A Few Interesting Stats…

a) The IRS assessed a record $7 billion in estimated-tax penalties in 2023, which was a 287% increase from the total assessed in 2022 ($1.8 billion). The main reason for the spike: higher interest rates.

b) The Nasdaq 100 ($QQQ) is up 40% in the past 3 years while the ARK Innovation Fund ($ARKK) is down over 60%.

“Buying funds based purely on their past performance is one of the stupidest things an investor can do.” – Jack Bogle (see video discussion here).

c) Wholesale used car prices are now at their lowest levels since March 2021, down 24% from the peak. This should lead to continued declines in retail prices in the coming weeks.

d) The 3 largest companies in the S&P 500 (Nvidia, Microsoft, & Apple) now make up a record 21% of the index.

e) In the last 10 years, US growth stocks have gained 355%. That’s an annualized total return of over 16% per year. What is Vanguard’s projected return for US growth stocks over the next decade? 0.4%-2.4% per year (see video discussion here).


And that’s all for this week. Have a great Sunday and week ahead!

-Charlie

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

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