The bleeding US stock markets are mired in a mounting bear fueled by extreme Fed tightening, already losing over a quarter of their value this year! Traders are wondering how long this rampaging bear will keep mauling stocks, and how severe the damage will be. This bear’s ultimate trajectory is partially dependent on how the gigantic American companies dominating major stock indices are faring fundamentally.
They are just wrapping up their Q3’22 earnings season, covering a challenging quarter for stock markets. The mighty S&P 500 (SPX) flagship benchmark US stock index fell a sizable 5.3% last quarter, exiting at a fresh bear low. This rather-aggressive beast had clawed the SPX down a serious 25.2% in just 8.9 months! But bears can grow a heck of a lot bigger and prowl for way longer, so this one still looks like a cub.
This is especially true of fundamentally-driven bears, that arise and exist to slash rampant overvaluations back down near historical norms. From March 2000 to October 2002, the SPX cratered 49.1% over 30.5 months. Later between October 2007 to March 2009, the SPX again plummeted 56.8% in 17.0 months! These dreadful ursa majors are nothing to be trifled with, mercilessly shredding away long years of gains.
Ominously today’s underlying economic conditions impacting corporate profitability are much worse than during those last bears. Monthly headline US Consumer Price Index inflation averaged 2.6% year-over-year increases during the early-2000s bear and 3.2% during that late-2000s one. But today’s young bear is seeing raging inflation, with the CPI averaging huge 8.3% YoY jumps gutting corporate earnings power!
The Fed was also far less hostile to stock markets during those prior great bears. Entering the earlier one, the federal-funds rate was running 6.0% before 50 basis points of hikes peaking at 6.5%. After that the Federal Open Market Committee frantically slashed its FFR way down to 1.75% by the end of that bear! Top Fed officials proved even way more dovish than that during that later bigger, meaner bear market.
As it stealthily awakened from hibernation, the FFR was running 4.75%. But the Fed panicked the deeper that bear mauled, slamming the federal-funds rate all the way down to 0.125% before that bear gave up its ghost! That was a zero-interest-rate policy, as the FOMC targets a quarter-point range for its interest rate. Those previous couple big bears suffered massive losses despite benign inflation and a dovish Fed.
But today’s is a radically-different story. Since mid-March 2022 alone, the FOMC has hiked the FFR an extreme 375bp from 0.125% to 3.875%! And just last week the Fed chair himself warned that rate hikes still “have a ways to go” to ultimate levels “higher than previously expected”. On top of these blisteringly-fast rate hikes, the FOMC is also actively destroying money through quantitative-tightening bond selling.
Neither previous bear had any QT, a roaring liquidity headwind for stock markets! QT2 is critical now because today’s raging inflation was directly fueled by extreme Fed money printing. In just 25.5 months into mid-April 2022, the Fed ballooned its balance sheet an absurd 115.6% or $4,807b monetizing bonds! More than doubling the US-dollar monetary base in just a couple years is why inflation is out of control.
Since June alone, QT2 has been ramped up to nearly double the terminal size of QT1 in only a quarter the time! At $95b per month of monetary destruction, QT2 would have to run for another 48 months to unwind the Fed’s post-pandemic-lockdown-stock-panic money spewing. Today’s stock bear growing during extreme Fed rate hikes and extreme QT is utterly unprecedented, making it far more dangerous.
So how big US companies are actually faring operationally is very important, offering clues as to whether this young bear will likely deepen. For 21 quarters in a row now, I’ve analyzed how the 25-largest US companies dominating the SPX did in their latest earnings season. As Q3 ended, these behemoths alone accounted for a heavily-concentrated 42.4% of the entire S&P 500’s weighting! They are detailed in this table.
Each big US company’s stock symbol is preceded by its ranking change within the S&P 500 over the past year since the end of Q3’21. These symbols are followed by their stocks’ Q3’22 quarter-end weightings in the SPX, along with their enormous market capitalizations then. Market caps’ year-over-year changes are shown, revealing how those stocks performed for investors independent of manipulative stock buybacks.
Those have been off the charts in recent years, fueled by the Fed’s late zero-interest-rate policy and trillions of dollars of bond monetizations. Stock buybacks are deceptive financial engineering undertaken to artificially boost stock prices and earnings per share, which maximizes executives’ huge compensation. Looking at market-cap changes rather than stock-price ones neutralizes some of stock buybacks’ distorting effects.
Next comes each of these big US stocks’ quarterly revenues, hard earnings under Generally Accepted Accounting Principles, stock buybacks, trailing-twelve-month price-to-earnings ratios, dividends paid, and operating cash flows generated in Q3’22 followed by their year-over-year changes. Fields are left blank if companies hadn’t reported that particular data as of mid-week, or if it doesn’t exist like negative P/E ratios.
Percentage changes are excluded if they aren’t meaningful, primarily when data shifted from positive to negative or vice-versa. These latest quarterly results are very important for American stock investors, including anyone with retirement accounts, to understand. They illuminate whether the US stock markets are fundamentally sound enough to stave off this young bear before it grows into a ravenous monster.
Bear markets don’t discriminate, eagerly mauling down even the best companies. And there’s no doubt these 25-largest American stocks dominating the US markets are all fantastic businesses. They couldn’t have grown so massive if they weren’t offering outstanding goods and services their customers want to buy. Nevertheless, these elite blue-chip industry leaders haven’t been spared this bear’s bloody claws.
Together their collective market capitalization dropped 16.7% YoY exiting Q3’22, mirroring the overall SPX’s 16.8% decline in that span. And surprisingly the market-darling mega-cap technology stocks led the way, Apple, Microsoft, Alphabet, Amazon, and Meta. For long years they were the five biggest SPX stocks. Although Meta’s stunning fall from grace has gutted its market cap, it remains a mega-cap tech.
Over this past year ending Q3’22, these five mega-cap techs saw their total market caps collapse 23.0%! Meanwhile the next-20-largest US companies only suffered a collective 9.5% market-cap decline. The beloved market generals are increasingly being shot, a dire omen for stock markets’ fortunes. Since bears exist to maul down overvaluations, their predations are the worst in expensive stocks like mega-cap techs.
Amazingly given the Fed’s raging inflation, these 25 biggest US companies still managed to grow their total revenues by a massive 20.2% YoY in Q3’22 to $1,133b! Seeming to again show why they are the best, that is distorted by SPX-top-25 composition changes over this past year. Those mega-cap techs have long reported the strongest sales growth, but their total revenues only climbed 9.2% YoY to $364b.
The next-20-largest American companies fared far better, seeing their aggregate sales explode a colossal 26.2% YoY to $769b. But that was heavily skewed by this past year’s soaring crude-oil prices catapulting Exxon Mobil’s and Chevron’s quarterly results far higher. Between Q3’21 to Q3’22, quarterly-average US oil and natural-gas prices rocketed up 29.5% and 84.3% to $91.37 and $7.96! That was a great boon for producers.
XOM and CVX Q3 sales blasted 51.9% and 49.1% higher YoY, dwarfing all these other elite companies’ growth with the exception of Tesla! Its quarterly revenues soared 55.9% YoY on fast-growing demand for electric cars as gasoline prices surged with crude oil. And with huge quarterly sales of $112b and $67b, XOM and CVX have outsized impact on the SPX-top-25 total. Excluding them, revenues look way different.
Simply pulling these oil super-majors out of both comparable quarters, the rest of these giant American companies saw total revenues grow 9.8% YoY to $954b. That’s not much ahead of monthly headline CPI inflation, which averaged 7.9% YoY gains in these past twelve months. So real inflation-adjusted sales for the biggest-and-best US companies ex-oil are just barely positive now with the US economy still deteriorating!
Interestingly strong top-line growth has long been one of Wall Street’s primary rationalizations for buying overvalued stocks. If revenues are stalling before starting to roll over in real and eventually even nominal terms, that would support considerably lower valuations. Weakening sales growth yields plenty of rich fodder for this voracious bear. High inflation pinches customers’ budgets, forcing them to buy less from companies.
Insufficient revenues growth also restrains earnings growth, even in the best of times. And while serious inflation is raging, rising input costs further erode corporate profitability. Companies simply can’t pass along all their higher costs in price hikes, as enough customers will be unwilling or unable to pay those higher prices. That further impairs sales, spawning a vicious circle increasingly pressuring corporate earnings.
This bearish dynamic is already taking root, as the SPX top 25’s total Q3’22 earnings under Generally Accepted Accounting Principles only grew 6.9% YoY to $161b. Those market-darling mega-cap techs actually fared far worse, seeing their aggregate profits plunge 17.8% YoY to $59b! Lower earnings raise their valuations, giving this young bear more fuel to keep rampaging. But overall profitability is even worse.
As the US president loves to rant about, the oil super-majors are earning massive windfall profits. In Q3 XOM and CVX saw their earnings skyrocket 191.3% and 83.8% YoY to $19.7b and $11.2b! Just pulling these two companies out of the comparable quarters, the rest of the SPX top 25 actually saw total GAAP earnings drop a sizable 9.6% YoY to $130b! Inflation and a slowing US economy are already hitting profits.
Bear markets exist to maul stock valuations from overvalued levels back down to normal ones. They are defined as stock prices divided by underlying corporate earnings per share, classic P/E ratios. Thus shrinking profits leave stocks more expensive regardless of prevailing prices. The longer earnings retreat during a bear from any cause, the longer that bear is likely to prowl and the more damage it is likely to do.
Weakening corporate earnings among the elite US companies along with soaring interest rates are also constraining their stock buybacks. For most of the decade-plus since October 2008’s stock panic late in that last serious bear, corporate stock buybacks have been the biggest and dominant source of capital inflows into stock markets. Without them, stock prices and the entire S&P 500 would be way lower today.
Big US companies financed their massive buybacks over the years through both ongoing earnings and borrowing, which was cheap during the Fed’s ZIRP years. But with earnings waning as inflation rages and debt-servicing costs soaring in this extreme rate-hike cycle, corporate stock buybacks are plunging. They collapsed 20.1% YoY to $81b across these SPX-top-25 companies, a precipitous and ominous drop!
That was even worse without Exxon Mobil and Chevron, with the rest of the biggest US stocks seeing their total buybacks plunge 28.1% YoY to $73b. That would’ve looked much worse still without the mega-cap techs, that have always been aggressive in manipulating their own stock prices. Last quarter’s buybacks from Apple, Microsoft, Alphabet, Amazon, and Meta only retreated a mere 3.3% YoY to a still-massive $52b!
But even these elite companies can’t maintain that torrid buyback pace. This research thread’s table puts stock buybacks next to GAAP earnings so we can easily compare the two. Shockingly in Q3’22, Apple earned $20.7b but spent $24.4b buying back its own stock! Alphabet plowed more into buybacks than its total profits too, $15.4b on just $13.9b of net income. Flailing Meta’s $4.4b of earnings supported $6.4b of buybacks.
Over the long term, stock buybacks can’t exceed some reasonable fraction of corporate profits. While the mega-cap techs do have vast cash hoards, they shrunk dramatically in this past year. Their total cash on hand plunged 21.2% YoY to $372b! They can’t keep burning cash fast to repurchase stocks forever. And with interest rates far higher thanks to this uber-hawkish Fed, borrowing for stock buybacks is too expensive.
Declining stock buybacks going forward will further weaken the US stock markets, aiding this young bear. And the mega-cap tech stocks disproportionally dominate stock buybacks, accounting for nearly 2/3rds of the SPX top 25’s total last quarter! So as they are forced to slow, those elite five stocks responsible for a staggering 21.1% of the entire SPX’s market cap are facing much-lower prices dragging down everything.
The big US companies’ mostly-flat real revenues and deteriorating earnings are very concerning alone with inflation raging and the Fed aggressively tightening. But the most-bearish fundamental portent for the SPX-top-25 stocks is their continuing severe overvaluations. Even after the S&P 500 plunged 25.2% essentially year-to-date into the end of Q3’22, the elite US stocks still remained very expensive relative to earnings.
Their average trailing-twelve-month price-to-earnings ratio did collapse 54.2% YoY, which is good news. But that was largely because Tesla’s P/E plummeted from 414x to a still-ridiculous 103x. Exiting Q3’22, these biggest-and-best US companies still averaged a lofty 29.2x P/E! That is technically still in bubble territory, which starts at 28x that is double the century-and-a-half fair-value average of 14x for the SPX.
It’s shocking to realize that even after losing a quarter of their value this year the elite US stocks are still sporting dangerous bubble valuations on average! That almost guarantees this young bear has a long ways to run yet. Ursa majors don’t give up their ghosts until they have mauled stock prices long enough and deep enough to force valuations back under 14x. Violent mean-reversion overshoots to 7x are even seen!
The last serious stock bear was that late-2000s one slamming the SPX that brutal 56.8% lower into March 2009. The SPX’s 25 largest component stocks then led by Exxon Mobil and Microsoft had average TTM P/Es of 13.7x exiting that bear-slaying month! The more extreme valuations are within an ongoing bear, the longer it will last and the more it will hurt. Today’s bubble valuations after a 25% SPX decline are scary.
Big US companies don’t only use their quarterly earnings to buy back stocks, but to pay dividends. Since receiving those quarterly cash payments has been a high priority for investors, companies are loath to cut dividends. Last quarter the SPX-top-25 companies actually grew their total dividends a huge 37.9% YoY to $41b. XOM and CVX did skew that a bit, but without them the total dividend growth was still 32.9% to $35b.
But with this first inflation super-spike since the 1970s eroding profits, sooner or later companies will have to cut dividends to reflect lower earnings. Maybe investors won’t care as much with bond yields getting competitive thanks to the Fed, but maybe lower dividends will spawn more stock selling. Mighty Apple’s huge $24.4b of stock buybacks in Q3 were accompanied by $3.7b in dividends, totaling 1.36x quarterly profits!
The SPX-top-25 companies’ operating cash flows also proved strong last quarter, soaring 27.0% YoY to $228b. That was the highest by far in the 21 quarters I’ve been advancing this research thread. But big oil again really distorted that. Removing XOM and CVX, that comparison moderated to 12.5% YoY gains to $188b. Interestingly the mega-cap techs only saw 0.1% YoY OCF growth, showing stalling businesses.
Just like consumers, when companies start seeing financial pressure they draw down their cash balances to make up the shortfalls. That is happening with these elite US companies, as their total cash treasuries dropped 16.3% YoY to $783b. Excluding those oil super-majors, their cash hoards plunged 20.8% YoY to $737b! Mega-cap techs again were slightly worse, seeing their cash fall 21.2% YoY at the end of Q3 to $372b.
While 20%ish cash burn rates could be sustained for a few years, odds are these companies will slow their spending much sooner. That will include laying off employees of course, but the low-hanging fruit for belt tightening is those corporate stock buybacks. Those waning significantly will add much momentum to this young bear. The former Facebook now known as Meta is a good example of what’s coming for more stocks.
Over this past year ending Q3’22, Meta’s market cap plummeted 61.7%! Its revenues contracted 4.5% YoY, leading earnings to collapse a brutal 52.2%. Meta tried to paper over that shortfall by drawing down its cash 28.1%. But it also drastically slashed its stock buybacks by 52.8% YoY! That contributed to its terrible stock performance. This week Meta just announced it is firing 13% of its workforce or 11k+ employees!
As raging inflation and a slowing economy take bigger bites out of other major US companies, they will be forced to follow Meta’s cost-cutting path. Not only do lower buybacks further weaken stock prices, but layoffs hurt the entire economy exacerbating the recession. This is really ominous with valuations still up near dangerous bubble levels with a young bear market underway. There’s a lot of valuation mauling left to do!
That argues this young bear has a long ways to run yet before giving up its ghost. Investors should pare their stock-heavy portfolios before it deepens. Upping cash allocations is one option, but the US dollar’s purchasing power is being rapidly eroded by this raging inflation. Gold, silver, and their miners’ stocks are the classic alternative investments that thrive in general-stock bears, and are poised to mean revert far higher.
This gold complex does even better during inflationary times. As raging inflation erodes corporate profits weakening stock prices, gold investment demand for prudent portfolio diversification soars. During the last similar inflation super-spikes in the 1970s, gold prices nearly tripled during the first and more than quadrupled in the second! Gold also thrived during past Fed-rate-hike cycles, which are bearish for stock markets.
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The bottom line is the big US stocks’ latest quarterly results exacerbated the risks this young bear market is far from hibernating. These elite American companies’ revenues largely stalled when adjusted for this raging inflation. And their nominal earnings actually fell as struggling consumers pull back discretionary spending. That left average valuations way up in dangerous bubble territory despite falling stock prices.
Excessive valuations are the fodder that ravenous bears devour, lingering until they are mauled back down to undervalued levels. A normal bear mean reversion and overshoot would warn the majority of this young bear is still yet to come. And corporate stock buybacks’ ability to stave it off is waning as they retreat. So it is prudent for investors to pare their heavy stock holdings and redeploy some of that capital in gold.
Adam Hamilton, CPA
November 11, 2022
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