On October 13, 2022, the S&P 500 index reached a stage bottom of 3,491 points, marking the start of a prolonged bull market that lasted for over two years. On February 19, 2024, it reached a new all-time high of 6,147 points, followed by a subsequent downward adjustment; the performance of the other two major U.S. stock indices (Nasdaq and Dow Jones) was similar. Given that the U.S. stock market has already declined by 10% from its peak (with Nasdaq declining even more), the entire market is focused on a question: Is this the end of the past two years and four months of the great bull market? Or is it another "false fall," like the ones that occurred in July-October 2023, April 2024, and July 2024?
History has proven that predicting the top is as difficult as predicting the bottom. I have several friends with extensive experience in U.S. stock investments, and they all believed that "everything was in place" between April and July 2024, selling off their entire holdings, including Nvidia and Apple. On a monthly or quarterly basis, no one, not even the most advanced quantitative funds, can "accurately" predict the market. However, we can at least discuss some longer-term and more fundamental issues, such as the following two questions:
There is a company with a revenue growth rate of around 5% and a net profit growth rate of around 10%, but its static price-to-earnings ratio is as high as 34 times. Would you be willing to buy it?
There is another company with a revenue growth rate of around 12% and a net profit growth rate of 15-18%, but its static price-to-earnings ratio is as high as 31 times. Would you be willing to buy it?
There is also a company with a revenue growth rate of around 15% and a net profit growth rate of 30-35%, but its static price-to-earnings ratio is as high as 45 times. Would you be willing to buy it?
The three companies mentioned above are: Apple, Microsoft, and Netflix. The first two are the largest and third-largest companies by market capitalization in the U.S. stock market, and the third is also a prominent large-scale technology company and a leader in the entertainment industry. Their P/E/G ratios are clearly far above 1.0; to perform a DCF model on them, one would need very lenient assumptions (such as a very high perpetual growth rate and a very low cost of capital) to conclude that they are undervalued. This is a microcosm of the current state of U.S. tech giants after a 28-month bull market.
Please note that when discussing the valuation of U.S. stocks, we often tend to be led by the computing power industry chain, getting caught in circles like "Is Nvidia a cyclical or growth company?" or "How should we value Broadcom?" The problem is that the computing power industry chain is only a small part of the U.S. stock market, even though it has already given birth to three companies with a market value of over $1 trillion (Nvidia, TSMC, and Broadcom). Since the valuation of the computing power industry chain is widely regarded as "occult," we can set it aside and look at other sectors. At least in the internet industry that I focus on, all the quality companies are not cheap. From a horizontal comparison perspective, some companies are slightly cheaper, such as Google and Meta, but we cannot say that they are "very cheap."
Looking back over the past two years, we can easily find that the U.S. stock market's great bull market was actually supported by two factors that were not entirely related to each other: AI and the economy.
Generative AI has significantly boosted the computing power industry chain, while also boosting almost all internet giants. For some companies, such as Nvidia, TSMC, and Microsoft, it has brought real revenue and profit growth; on a broader scale, it has brought confidence.
The U.S. economy has turned out to be much more resilient than expected, and the recession that investors were anticipating has not materialized. From July to October 2023, the market experienced a long and anxious adjustment, and then the consensus expectation became that there would be no recession in 2024. U.S. consumer and employment data have been extremely strong, and inflation has also been brought under control to a certain extent.
Starting in the second half of 2024, a third factor was added: the expectation of interest rate cuts by the Federal Reserve - this will be the first "normal" rate cut cycle since 2001, without being disrupted by major external events. In this way, the capital market has witnessed an extremely rare "trinity" of positive factors: the overall macroeconomic strength, the flourishing of the new technological revolution, and the Federal Reserve's interest rate cuts! You can hardly imagine a better scenario than this!
Even the frequent international geopolitical tensions in the past two to three years have been providing ammunition for the U.S. stock market: to a certain extent, the U.S. stock market, like gold, plays the role of a geopolitical "safe haven." If you are somewhat concerned about the international situation, but not too much, you may be likely to shift your positions from emerging markets and other developed markets to the U.S. stock market. So we have repeatedly seen that whenever there is a disturbance in any corner of the world, regardless of who wins or loses, the beneficiary is the U.S. stock market. At first glance, this may seem unfair, but it is actually logical.
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