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The most important charts and themes in markets and investing…
1) Active Managers Go All-In
Active managers reduced their equity exposure by 35% in April when the S&P 500 fell below 5,000.
Last week, their equity exposure jumped more than 100% (leveraged long) with the S&P 500 at 6,900.
This is their highest equity exposure since July 2024. What happens then?
-10% correction in the S&P 500.
2) Only a Few Bears Remain
The % decline in the Investor Intelligence sentiment index fell to 13.5% last week, below 98% of historical readings.
This is also the lowest level we’ve seen since January 2018. What happens next?
-12% correction in the S&P 500.
3) The Most Extreme Valuation I’ve Ever Seen
Palantir was trading at more than 240x forward earnings earlier this week, the highest valuation for a company of its size ($491 billion market cap) I’ve ever seen.
The S&P 500 is currently trading at around 3x forward sales.
What about Palantir? 87x
4) The $5 Trillion Club
10 years ago Nvidia had a market cap of $15 billion.
Last week, it became the world’s first $5 trillion company.
That’s a 335x increase.
5) Note Narrowing Concentration and Progress
The outperformance of big tech companies led to more record highs in terms of concentration in the S&P 500:
-Nvidia now controls 8.6% of the S&P 500, the highest weighting for any stock in the index ever recorded.
-Nvidia, Microsoft, and Apple represent more than 22% of the index, a record high for any 3 stocks.
The top 5 holdings in the S&P 500 now control more than 29% of the index, the highest concentration we’ve ever seen.
-The top 10 holdings in the S&P 500 now control more than 40% of the index, the highest concentration ever recorded.
The average stock in the S&P 500 is up 42% over the past 3 years compared to an 86% gain for the cap-weighted index.
As a result of this poor performance, the S&P 500 Equal Weight to S&P 500 ratio is now at its lowest level since 2003.
Although all the major indexes hit record highs in October, many individual stocks did not reach record highs.
In fact, 40% of the Nasdaq 100, 42% of the S&P 500, and 52% of the Russell 2000 were down at the end of October.
The market still looks strong, but the advance is narrowing.
6) Big Tech, Big Profits
It was another record quarter for Big Tech, with:
- Apple Revenue grew 8% YoY to a new Q3 record of $102 billion and Net Profit grew 92% YoY to a new Q3 record of $27 billion.
- Google Revenue grew 16% YoY to a new record high of $102 billion and Net Profit grew 33% YoY to a new record high of $35 billion.
- Microsoft Revenue grew 18% YoY to a new record high of $78 billion and Net Profit grew 12% YoY to a new record high of $28 billion.
- Amazon Revenue grew 13% YoY to a new Q3 record of $180 billion and Net Profit grew 38% YoY to a a new record high of $33 billion.
Combined Revenues for these four companies reached a record $1.8 trillion over the past 12 months, greater than the GDP of all but 15 countries.
7) More Interest Rate Cuts and the End of QT
The Fed cut interest rates again by 25 bps last week, which brought the Fed Funds Rate down to a new range of 3.75-4.00%. They have now cut interest rates by 150 bps since September 2024 and are expected to cut another 25 bps at the December meeting, bringing the Fed Funds Rate down to 3.50-3.75%.
The Fed’s balance sheet is now at its lowest level since April 2020, down $2.4 trillion from its peak in April 2022. That’s a decline of 26.7%, the largest decline ever recorded.
How many more QTs would it take to cancel all QE from March 2020 to April 2022?
$2.4 trillion.
Will that happen?
No. At last week’s FOMC meeting, the Fed said QT would end on December 1 this year.
What happened after that?
If history is any guide, we will likely return to QE in the near future.
8) More Sellers Than Buyers
US Home Prices rose 1.5% over the past year, the slowest growth rate in more than two years.
9 cities in the 20-city Case-Shiller index now have negative 1-year returns and with sellers outnumbering buyers by about 500 thousand, that number is likely to increase in the coming months.
9) Some Interesting Statistics…
a) “Sell in May and Leave”
There is no evidence to support this interesting statement as the market was still positive by 72% from May to October with an average annual increase of 6.6%.
This year, the market performed much better, with the S&P 500 up 24% from May to October.
b) 72% of all US data center capacity is in just 1% of regions.
c) The ratio of the Defensive Consumer Staples ETF to the S&P 500 ETF has fallen to a record low, below the peak of the dot-com bubble in March 2000.
d) Apple has repurchased $709 billion worth of stock over the past 10 years, greater than the market capitalization of 487 companies in the S&P 500.
e) The $10,000 invested in Amazon in its May 1997 IPO is worth nearly $25 million today.
And that’s all for this week. Thanks for reading!
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