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Today’s market seems to have become totally obsessed with the short term, focusing on the “most important” data points each week. For example, last week it was the minutes of the last Fed meeting, followed by a laser focus on Fed chairman Jerome Powell’s Jackson Hole conference speech… both of which we seemed to survive quite nicely. This week, it is earnings from artificial intelligence superstar Nvidia (NASDAQ:NVDA) and the Personal Consumption Expenditure (PCE) index that is due out on Friday.
I’m not sure about the long-term impact an above- or below-expectation PCE will have, but Nvidia earnings might be a totally different kettle of fish, and not the way that the author of the headline of this article fears.
Nuance is important
Nuance is something we don’t get very much of in today’s media-poor environment. “The media” in general is out to capture your attention by whatever means necessary… sensationalism, fearmongering (bad news sells) and the provision of news or information catering to your own biases, proclivities or interests.
Most of the time, this has little to do with factual, nuanced discourse. Taking this one step further, much of the computerized, data point-based trading that dominates today’s market is not nuanced. These programs react to particular numbers or headlines in the way their programmers believe they should respond.
Ergo, an above-expectation PCE number Friday will send the market down, regardless of cause, because the programmer has determined that might put the Fed on hold regarding rate cuts. The computer does not analyze why the miss. It is only programmed to sell on the headline. The same holds true for many market participants who always seem to have their bags packed with one foot out the door. We saw a pristine example of this at the beginning of August.
My Nuanced Re-write
If I were writing the CNBC article headline, I would substitute the “tech sector” for “world’s.” Why? Because the market is not a monolith. Let’s take a look at Ed Yardeni’s P/E for the “Magnificent 8” (he includes a favorite, NFLX – only $300 billion market cap – not material impact to PE), S&P 500 (large cap – includes “Mag 8”), S&P 400 – mid-cap and S&P 600 – small-cap.
- The Magnificent 8 — 29.0 X (forward 12 mo. ests.)
- S&P 500 (including Mag 8) — 21.1 X
- S&P 400 (Mid cap) — 15.8 X
- S&P 600 (Small cap) — 15.3 X
As you can see, the “Mag 8” (the home of NVDA) is the clear leader in the P/E race. The current total market capitalization of the S&P 500 is approximately $45.8 trillion. The “Magnificent 7” represents about thirty percent of that total, $13.74 trillion. Ergo, without the weighting of the Mag 7 in the cap-weighted index, again just those seven stocks, we would be looking at an index P/E closer to 15 times forward earnings. Fifteen times earnings is not excessive. In fact, it is just about the long-term average. With this said, daily we are bombarded with opinion by so-called experts claiming that the entire market is grossly overvalued and when the bubble breaks, look out below! There is absolutely no nuance here.
Reading commentary and feedback on my posts and those of others, I get the idea many subscribe to the theory that the entire market is overpriced. This is simply not the case.
Bottom Line
The entire market is not overpriced. Large-cap tech/AI-related stocks may be. Disappointment in Nvidia’s quarter earnings or guidance may accentuate a leadership change that I believe is already in progress… a change away from a very crowded trade in big tech to a resurgence of much of the market that has been ignored during the ascendency of AI.
What’s your take?
