The popularity contest is alive and well in the stock market. The S&P 500 is at all-time highs, up 9.2% year to date. That’s total return, by the way. If that seems surprising in any way, you’re not alone.
On the surface, one might conclude that we’re in a raging bull market. The enthusiasm, the speculation, the day trading…all the ingredients are there.
A more nuanced answer is that there’s a bull market in a handful of names hiding a bear market in many more.
The largest companies in the S&P are performing exceptionally better than the rest. So much so, that it’s having an outsized impact on the index. The numbers are mindboggling really.
- Apple went from 23x earnings to start the year to 38x today for a $834 billion increase in market cap this year.
- Amazon went from 80x earnings to start the year to 131x today for a $787 billion increase in market cap this year.
- Alphabet went from 28x earnings to start the year to 36x today for a $178 billion increase in market cap this year.
- Microsoft went from 29x earnings to start the year to 39x today for a $512 billion increase in market cap this year.
- Facebook went from 32x earnings to start the year to 36x today for a $250 billion increase in market cap this year.
In total, that’s a $2.5 trillion gain in market cap year to date! For five companies! (That it occurred with little change in fundamentals should be noted.)
To put one of those numbers into context, Apple gained a Facebook this year! Apple’s market cap increase equals the entire market cap of the fifth-largest company! Amazon is a rounding error away from doing the same.
Of course, that performance has only made them more popular. Companies once deemed uniquely “safe” from today’s problems, now seem to be “safe” at any price. And therein lies the dilemma.
Popularity can be infectious. Especially when it involves making money. Which can drive prices to extremes. And history has shown that paying a high price for popular stocks rarely produces the returns we expect.
Maybe these five companies are the exception to the rule. That’s the running narrative anyways. At the very least, it’s a reason to be cautious. The biggest risk for investors is getting caught up in the excitement.
…human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. — John Maynard Keynes
Last Call
- Cue the Camouflage – Albert Bridge Capital
- Even Great Investments Experience Massive Drawdowns – Alpha Architect
- How Risky Are Value Stocks? – Factor Research
- Thank God for Zero Interest Rates – Klement on Investing
- Hindsight 1720: What Can We Learn From The South Sea Bubble — Lookout Investor
- Preparing Your Mind for Uncertain Times – The Atlantic
- The Information Lifecycle: How Three Filters Shape the Mind — More to That
- The Inside Story Of Robinhood’s Founders, Option Kid Cowboys, And The Wall Street Sharks That Feed On Them – Forbes
- The Inside Story of the $8 Million Heist from the Carnegie Library – Smithsonian
