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Examining Big US Stocks in Q1’24

The Delusion of Big US Stock Valuations

The big US stocks dominating markets and investors’ portfolios continue to showcase astounding resilience. Their performance during the latest earnings season has been nothing short of breathtaking. However, this prosperity stands in stark contrast to the slow growth of underlying profits, pushing valuations deeper into an ominous bubble chamber. The unchecked rise of stock prices underscored by herd mentality and market psychology has obscured the fundamental reality of these companies.

Quarterly financial reports serve as a reality check, dispelling the mist of emotions that often cloud investors’ judgment. These reports bring forth a treasure trove of data, from full financial statements to management’s insights on future strategies and growth. They act as a lighthouse in the stormy sea of market speculation, providing invaluable information for investors.

The Euphoria of Q1’24 Market Performance

The first quarter of 2024 witnessed a meteoric rise in the flagship stock index, driven predominantly by the giants of the US stock market. With relentless gains pushing major indices to dizzying heights, a sense of euphoria and greed enveloped investors. However, such exuberance often precedes a reckoning in the form of market corrections or bearish downturns. All eyes are now on the market, especially those dependent on big US stocks for their retirement savings.

Insights from Big US Companies’ Q1’24 Results

As the dust settles post-Q1’24, investors eagerly assess the performance of the top US companies that dictate market trends. These behemoths, commanding a lion’s share of the market cap, play a pivotal role in shaping the market sentiment. By delving into their quarterly results, investors gain crucial insights into the market’s trajectory and inherent risks.

Concerns Amidst Market Concentration

The top-heavy nature of the US stock market poses a significant risk, with a handful of mega-cap tech stocks dominating the landscape. The disproportionate influence of these tech giants, including Microsoft, Apple, and Amazon, raises concerns about market stability. The overreliance on these market darlings leaves the broader market vulnerable to sudden shifts and corrections.

The Sway of Mega-Cap Technology Companies

The Magnificent 7 mega-cap technology stocks continue to wield immense power, driving market trends and investor sentiment. The staggering market cap amassed by these tech behemoths underscores their influence on the overall market performance. However, the unchecked growth of these stocks, fueled by peer pressure and market dynamics, raises alarms about their sustainability and the broader market’s health.

The Allure and Risks of Mega-Cap Tech Stocks

While the allure of mega-cap tech stocks remains strong, the overreliance on these market giants poses inherent risks. As fund managers flock to these tech darlings in pursuit of stellar returns, the market becomes increasingly vulnerable to corrections and downturns. The success of these mega-cap stocks is a double-edged sword, promising riches while potentially leading the market into uncharted territory.

Revenue Woes: Tech Titans Face Growing Pains
Revenue Woes: Tech Titans Face Growing Pains

Despite their colossal size and scale, the Mag7’s total revenues surged 13.3% YoY in Q1’24 to $456.3b. Leading the way was NVIDIA riding that AI boom, its sales skyrocketing a jaw-dropping 265.3%! But cracks are spreading even among these elite market darlings. Both Apple and Tesla suffered falling sales last quarter, down 4.3% and 8.7% YoY respectively. These mega-cap techs fully depend on consumer demand.

Consumer Pinch Squeezes Tech Giants

Recent years’ economic landscape has really pinched Americans’ budgets. While headline inflation rates have moderated considerably, prices remain way higher than pre-Biden-Administration levels. Forced to spend much more on life’s necessities including food, energy, shelter, and insurance, people have much less discretionary income left to splurge on pocket computers and battery cars. Apple and Tesla are feeling this.

Apple’s Decline Amid Global Tensions

Apple actually breaks out quarterly revenues into geographic segments. In the Americas those slumped 1.4% YoY in Q1, reflecting softening iPhone demand. But Greater China’s sales plunging 8.1% YoY was a bigger problem for Apple. China’s ruling Communist Party is whipping up anti-American sentiment, encouraging the Chinese people to buy smartphones from Chinese companies including Huawei and Vivo.

The iPhone Conundrum

But even if Americans had money to burn, their iPhone upgrade cycle is lengthening considerably. New models have marginal improvements, but existing ones continue to run everything fast for several years or more. Social incentives to upgrade are waning too, as all iPhones essentially look the same.

Apple’s growth years may be over, arguing its stock needs a much-lower valuation. Q1’24 isn’t the first quarter sales dropped. While they edged up 2.1% YoY in Q4’23 on the iPhone 15 launch, they had fallen for four consecutive quarters leading into that!

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Tesla’s Struggles in a Niche Market

Tesla’s problems are much worse, since its cars are way more expensive. Not only can fewer Americans afford to buy Teslas, but electric-car enthusiasts already own them.

Rather unusually, the next-18-largest US stocks after the Mag7 nearly matched the mega-cap techs’ huge revenues growth. The former’s sales surging 11.4% YoY rivaled the latter’s 13.3%! But that was simply caused by composition changes in the SPX top 25.

Earnings Disparity and AI Chips

That massive bifurcation between the mega-cap techs and everything else was even more apparent in bottom-line earnings last quarter. The Mag7’s GAAP profits rocketed a shocking 50.0% YoY to $105.5b, while the next-18-biggest US stocks’ plunged 23.5% to $81.4b!

NVDA of course is the poster child for artificial intelligence. Its demand for NVIDIA’s flagship H100 GPUs has skyrocketed, particularly from deep-pocketed hyperscalers like Microsoft, Alphabet, and Amazon rushing to build out cloud AI infrastructure as fast as they can.

Risks for NVIDIA’s Dominance

Other chipmakers and even the hyperscalers themselves are rushing to design their own AI chips to excel in AI’s enormous parallel processing. Even if they aren’t as cutting-edge as NVIDIA’s GPUs, they will be fast enough and far cheaper eroding NVDA’s market share.

Pharma Boom Amidst Uncertainty

The next-18-biggest US stocks’ Q1’24 GAAP earnings actually surged a surprising 10.9% YoY! Big pharma were major contributors, with Eli Lilly, Merck, and AbbVie seeing earnings rocket on soaring drug demand!

Leading the way is the GLP-1 agonist drugs for diabetes and weight loss. Eli Lilly’s versions of those are Mounjaro and Zepbound. So people are scrambling for this new class of hormone-suppressing drugs, despite no long-term studies on them.