Investors are elated at recent all-time highs in the S&P 500: the covid crash has been resoundingly reversed. Hmmm…..not so fast. Microtek, Facebook, Amazon, Apple, Netflix, and Google between them account for about a third of the S&P 500 because those stocks have been doing very well. They have benefitted from the pandemic --- people sitting at home and buying, subscribing, and purchasing from them and their advertisers. Easy to do when there is so much new cash on the loose. So hard have they moved the S&P 500 that we may as well think of it as the S&P 6. The other 494 stocks as a group have not had the same recovery. About half the stocks that comprise the Dow Jones Industrial Average are tech stocks, so it has done well also.
I think that eventually, people will wake up to realize that a P/E ratio of 33 for Facebook, 80 for Netflix, and 119 for Amazon may be unwarranted. Yeah, when customers of each of these companies could be numbered only in the millions, it may have made sense to anticipate the kind of growth in earnings that would justify such large P/Es, but once you have half the world’s population as your customers, does it make sense? How much higher can your customer base grow then? Or, maybe you think that existing customers will start spending a lot more. Maybe they will. Or even more likely, maybe they will tighten their belts as the economy contracts. Once government covid subsidies cease and businesses are footing their own payroll burden, watch for huge layoff numbers. It is already happening, even with the subsidies. The disparity between a slowing economy and a rising stock market will disappear as they align for the trip down. At least that is my expectation.
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