Last week, Goldman warned that market concentration had exceeded levels seen during the dot-com boom (and subsequent bust).
“Coming into 2020, the five largest S&P 500 stocks accounted for 18% of index market cap, matching the share at the peak of the Tech Bubble in March 2000”, David Kostin wrote, adding that “since then, those stocks (MSFT, AAPL, AMZN, GOOGL, FB) have risen to account for 20% of market cap”.
That underscored the notion that despite the grievous swoon for markets in March, big-cap tech is still a bubble on a relative basis, and likely on an absolute basis as well, with Microsoft, Apple, Amazon, Google and Facebook trading at – checks notes – 28x expected 2021 EPS.
Read more: Goldman’s Warning – Market Concentration Now Exceeds Tech Bubble Peak
Goldman cautioned that “eventually, narrow rallies [often] lead to large drawdowns as the handful of market leaders ultimately fail to generate enough earnings strength to justify elevated valuations and investor crowding”.
That’s the “catch-down” scenario, in which gravity reasserts itself, yanking the largest names down to what, in hindsight, is seen as the “reality” of the broader market.
Fast forward a week and after taking a look at earnings from the heavyweights, Kostin says “the results suggest an imminent catch-down is unlikely”. To wit, from Goldman:
Collectively, the firms reported calendar 1Q revenues of $228 billion, 14% above the year-ago quarter. Looking beyond this year, GS analysts forecast the stocks will post 2019-2021 CAGR sales and EPS growth of 14% and 12%, respectively. In contrast, consensus expects the other 495 index constituents will report growth of 1% and 2%.
That’s a laughable disparity, and it’s reasonable to suggest it could be even wider than those forecasts suggest. After all, the other 495 index constituents include some names that will continue to be adversely affected by the fallout from the pandemic, especially in the event consumption habits are forever altered as part of a broader societal shift brought about by the worst public health scare in a century.
The disconnect between FAAMG and the rest of the S&P in 2020 is astounding. Amazon’s Friday nosedive notwithstanding, the gap is widening.
(Goldman)
Although it doesn’t exactly say much for the health of corporate America when ex-oligopoly (if you will) sales and profit growth is expected to be just 1% and 2%, respectively, the silver lining is that a nauseating “catch down” for the titans isn’t likely – or at least not according to Goldman.
The bad news is, at 28x expected 2021 EPS, there’s not much upside for the heavyweights either.
“The group of five stocks has upside potential of just 3% to GS analyst price targets [while] the other 495 firms trade at 16x 2021 EPS and have 10% upside to targets”, Kostin goes on to say.
The (potential) problem with this should be immediately obvious. On Goldman’s estimates, we’re now counting on the rest of the market to shoulder the burden of further upside at a time when the economy is mired in the worst slump since the Great Depression.
Further, the assumption that the other 495 stocks are trading at just 16x forward earnings relies on consensus estimates being some semblance of correct for 2021 EPS. If those estimates turn out to be too optimistic, then the current multiple is actually higher.
Draw your own conclusions.
Can’t forget NVDA & NFLX and most of the Nasdaq 100 also. What recession?
Facetiously mentioned……….The Equity markets have an uncanny talent for moving the goalposts/hurdles around at just the correct intervals with the use of analyst expectations and resultant rational for earnings… We have seen this show before …so be cautious everyone….
checks notes — 28x expected 2021 EPS
EPS which will be revised downward several times going forward, making these bubble stocks, super tulip bubble stocks with p/e ratios at levels where idiots will be hard pressed to find speculators not laughing. I realize a lot of people are morons, but how does one get into a position where information doesn’t register or process?
Fear of losing your job if you run a fund, that’s how.
I was surprised the Other 495 are down only 13% YTD (thru 4/30). Given the state of things, I’d say that’s where the true over-valuation lies (…at least the Group of Five have good “moats”).
To borrow Howard Marks’s line: It seems to me that the economy is more than 13% broken right now.
Mr. H,
Why do you follow David Kostin; he’s seems to have a track record of having to u-turn on his wrong calls? Wondering if there’s something I’m missing?
I would encourage you to be careful where you get your information. If you have not read the originals (which I’m assuming you haven’t), then how do you know that your assessment is correct? People spin this stuff any which way to suit the needs of their own web portals. I know this is uncomfortable for some folks to come to terms with, but it’s the truth: There are some websites out there who take this research and distort it beyond recognition on purpose in order to generate click money. Don’t fall for that, man. Please. Always consider the source. If you’re reading a website that you wouldn’t trust to give you accurate information about, say, politics, then why would you trust they are accurately representing a piece of research from Goldman? Use your brain.