Published March 15, 2024
Below we provide a recent report from Delta Research putting some of the current market events in a broader context. Enjoy!
“U.S. share of global equity value has risen to 50%. The U.S., with a population of about 332 million people, has created half of all equity wealth in a world of 7.9 billion people. If this does not indicate capitalism works better than socialism and communism, it is hard to image what would.
From the lows of October of 2023, the total wealth creation from the rally in US equities is $10.3 trillion. For context, the base level of US GDP is $28.3 trillion.
The median Price/Earnings (P/E) of the 10 largest stocks in the S&P 500 today is 29x. In the tech-bubble peak in 2000, it was 47x.
Since December of 2019, the Magnificent Seven (AAPL, MSFT, GOOG, AMZN, NVDA, TSLA and META) stocks have collectively delivered a 28% annualized return. 27% of the advance is attributable to earnings growth. Only one percentage point is caused by P/E multiple expansion.
The Magnificent Seven reinvests 60% of its cash flow into growth capital expenditures and Research and Development (R&D). This is more than 3x what the other 493 S&P 500 companies reinvest. Because of the magnitude of the reinvestment by the Magnificent Seven and the geometric power of compounding, the competitive landscape is increasingly characterized by a winner-takes-all dynamic.
Corporate stock buybacks are active. Goldman Sachs believes buybacks will be up 13% year-over-year and reach $925 billion in 2024. Goldman is estimating buybacks in 2025 will be up another 16% to $1.075 trillion – an all-time high.
The first industrial revolution began in the mid-to-late 1700s when goods migrated from being all hand made to machine made in larger batches. As odd as it may seem in hindsight, the second industrial revolution occurred at the end of the 19th Century and at the start of the 20th Century and was known as the technological revolution. It involved rapid advances in standardization and mass production.
The third industrial revolution began in the late 1960s and is called the “computer” or “digital” revolution because of advances in semiconductors, computing power and the Internet. Industrial revolutions are times of enormous wealth creation. Microsoft, Intel, IBM, Cisco, Dell, Apple, etc. are examples.
The current bullish stock market action suggests we may be entering the fourth industrial revolution involving data science. Processing times and memory capacity have reached a point where the next stairstep productivity advance is in data analysis rather than machine performance. Data science underpins artificial intelligence. If this is the case, we should see major new companies rise as they have in prior productivity revolutions. Nvidia appears to be a front runner in the latest revolution.
The Consumer Product Index (CPI) inflation report showed more overall inflation than expected this week. The stock market response was bullish as a majority of the inflation was driven by higher shelter (housing and rent) costs. Shelter costs are expected to moderate in the near term and stock investors were willing to “look-through” the report. Excluding shelter, CPI was up 1.8% year-over-year rather than 3.2%.”
Market Update
With quarterly earnings reports winding down, investors have been shifting their focus to the ever-present discussion of when the Federal Reserve will begin cutting interest rates. As this is driven in large part by economic and inflation news, those topical reports are at the forefront of investor’s minds now. Monday saw markets trade flat while Tuesday brought a +1.1% lift as a seemingly stubborn inflation report and subsequent uptick in interest rates didn’t faze stock bulls. Stocks slipped back a slim -0.2% Wednesday as energy stocks moved higher on a jump in oil prices. A further -0.3% dip in stocks Thursday as another inflation report pointed to stubborn prices, this time at the producer level. That report sent interest rates upward again. But the impact on stocks was minimal with a -0.3% result. Stocks slid further Friday with the S&P 500 off -0.7% as software maker Adobe and beauty products retailer Ulta both provided weaker than hoped-for reports. Interest rates ticked higher for the fourth straight day reversing two weeks of declines as this week’s inflation reports pushed out expectations for a rate cut by the Fed. Commodity prices posted strong gains during the week though the U.S. dollar rose as well. So we will see if the commodity group can put together a sustainable move as a rising dollar usually acts as a drag on the group.
Stocks paused this week with the S&P 500 (SPY) flat at -0.08%. The Nasdaq 100 (QQQ) slid -1.17%. Smallcap stocks (IWM) fell back -2.16% hurt by the higher interest rates. Interest rates staged their biggest move in months though it only served to offset three weeks of losses.
Warm wishes and until next week.