The YTD rally in the S&P 500 has been dominantly comprised from the performance on the top 8 stocks, all of which performed poorly last year.  This is by far the narrowest rally since the Tech Bubble, which ultimately culminated in an 80% drop in the Nasdaq.  These stocks are so big and comprise such a dominant weighting in some of these indices, that effectively, they are the market in many respects.  This is great in a bubble as those tailwinds help investors, but it is devastating when the bubble bursts, as we have seen play out so many times.  Investing is about making logical and fundamentally based decisions where you should have a reasonable expectation of a profit.  Speculating into a bubble doesn’t meet that requirement, which is why we are taking a more conservative and disciplined performance that we fully expect to generate strong returns, but also provide protection when this bubble unwinds, as it most likely will.  It can be hard to go against the grain.  There is a true story about a great investor buying an enormous amount of beanie babies when they were immensely popular to corner the market, only to see prices and demand fade, costing him a fortune.  Once again, this is a business approach to investing, which we recommend and implement.


Some might argue that these top eight stocks aren’t in a bubble.  Does AI only help them and their competitive position?  That seems unlikely.  I wouldn’t classify all these stocks as being in a bubble on an individual basis, as we’ve owned a handful of them when they traded at dramatically cheaper valuations, and we still do own some but have hedged the risk down a bit as the valuation multiples have expanded. 


We will look at the forward price to earnings ratio, which factors in growth expectations, which have increased.  We will also look at trailing twelve-month earnings ratios, which will show what has already happened.  Remember that the inverse of a P/E is the earnings yield, or the amount that a business would pay out to you at the price, if it actually paid out 100% of earnings as a dividend, which very few businesses actually do.  You might compare these earnings yields to bond-yields, which we’ve been getting 7-13%, with what I’d argue to be a dramatically lower risk profile.  These are just individual data points, and there is much more to investing than just looking a few key ratios, but I can tell you that these types of valuations are very hard to justify, and usually do not end up particularly well, which is why I think it is a good idea to exercise caution at the moment.  There are a lot more attractive opportunities out there, which I think will do much better over the long-term.  Earnings season starts in a few weeks, which I think should be a nice catalyst for many of our positions.  Hope you are having a nice start to your summer.


Stock Symbol    Forward P/E    TTM P/E

1) NVDA            47.1                  220.3

2) META            22.5                  35.9

3) TSLA             69.6                  75.4

4) AMZN            75.5                  307.5

5) AAPL             29.7                  31.7

6) NFLX             34.9                  45.6

7) MSFT             31.8                  36.3

8) GOOG            21.9                  27.3