Market Frothiness: A 2021-Like Bubble

During their latest episode of the VALUE: After Hours Podcast, Carlisle, Taylor, and Bloomstran discussed Market Frothiness: A 2021-Like Bubble. Here’s an excerpt from the episode:

Tobias: No, they’re good for you. Chris, this market was pretty loopy through 2021. Feels pretty loopy again to me now. Given that you actually have been doing this professionally through the fall period, what do you think, are we at 99 levels of loopiness now, or are we still sort of–? We’re 2021 levels of loopiness. Where are we? How do you feel about the market right now?

Jake: What inning is it? Is that–?

[laughter]

Christopher: No, it’s late. It’s late, and we are in extra innings. I thought 2021, the end of 2021 was a secular peak, and I’ve got a section in the letter on it. You look at what stocks had done in the decade leading up to that, 16.6% a year. Profit margins were at all time high, 13.3%. You were 22.9%, I think, as a multiple on earnings. And so, when you’re capitalizing a record profit margin at a historically very high multiple, it doesn’t leave a lot of margin for air. And then things blew up in 2022, and you had the big recovery last year. And essentially, the S&P was up 1.7%, the Mag 7 now that you’ve added Nvidia and Tesla to the mix, they were up something like 2.7% for the two years.

Here up this year, S&P is up, whatever it is, 8% or 9%, and the Mag 7 is up 15% or 16%. You’re back to those 2021 levels. Whether you call 2021 or secular peak or this moment a secular peak, getting much more out of the market– We can get into this, but the factors that make up how you generate returns are pretty much stacked against the aggregate investor. So, I think things are pretty frothy in a lot of parallels. This Nvidia, my God, Thursday, had something like a $270 billion swing in market cap, intraday. My God, the whole market cap of the company was less than that in October of 2022, a year and a half ago.

Jake: Yeah, that’s wild.

Tobias: Back in the old days.

Jake: Yeah. [chuckles]

Christopher: Back in the old days. Yeah. But in fairness, I’ve never seen a large company mature. They’ve been public for a long time. What’s going to be two consecutive years earn more than their prior year’s revenues. Think about that.

Jake: Yeah, it’s wild.

Christopher: Now, I don’t think a 55% margin is sustainable, and you happen to have a shortage right now of what they sell to their handful of big customers. But the big customers not going to allow a 55% margin. They’re going to manufacture some of their own stuff. You’ve got some competition. And so, you’ll have misses. And at 2$.4 trillion that thing was kind of ridiculous. I thought it was ridiculous at $1.2 trillion. I think in retrospect, when you look at this thing 10 years out, whatever, you’ll have miss, miss, miss somewhere between here and there, and the thing will be more rational.

But it’s as frothy as anything in the late 90s. Now, great business growing. But Microsoft was ridiculously expensive in the end of 1999. As I wrote in my January 2000 letter, I said shareholders will lose money for 15 years. And indeed, they did. Because you couldn’t do $620 billion market cap on 20 billion in sales, albeit at a 37% or 38% margin. It was that far ahead of itself. And at $2.4 trillion on $60 billion in revenues, what’s going to wind up being 110 this year. If they do a 55% margin, whatever, they make $30 billion net. Using today’s level of revenues and profits, it’s way, way, way ahead of itself.

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