The Tyranny Of Groupthink

The broad market (S&P 500) is trading at the highest forward PE multiples since November 1999, but the financial press is rife with mendacious piffle claiming there is no bubble. For example, in celebration of Tuesday’s all-time high on the S&P 500, one James Mackintosh of the Wall Street Journal minced no words:

Except, the Everything Bubble is in the imagination of the many investors complaining about it. First, it isn’t everything. Second, it isn’t a bubble….

Right. Supposedly, the above statement is true because energy sector stock prices are in the tank, but the market is being rationally led by the tech giants where allegedly solid prospects for earnings growth are being rewarded with higher PE multiples owing to ultra-low interest rates.

…. Lower rates mean profits further in the future matter more to the share price, so companies with steady earnings no matter what the economy does are worth more. Those that are sensitive to the economy are worth less, because future earnings are expected to be hit. Growth stocks do incredibly well, because their future earnings are expected to be higher and, at least for those thought immune to economic weakness, worth more as well thanks to lower rates.

Apply this framework and there’s no bubble. U.S. stocks are more highly valued than in the past because they are dominated by big growth stocks, themselves justifiably more highly valued thanks to low rates.

The sheer laziness and conformism of today’s so-called financial journalists is a wonder to behold. When the leader of the tech growth stocks, Apple, crossed the $2 trillion market cap barrier for the first time today, thereby embodying more market cap than the entire Russell 2000 of small cap US companies, Mackintosh’s colleague at the Wall Street Journal spewed the same groupthink:

The stock has more than doubled from its March 23 low, boosted by steady demand for the company’s devices and better-than-feared results in its core iPhone business as millions of Americans work from home.

Steady sales growth is driving the string of achievements. Apple’s sales rose to $260 billion in the fiscal year ended in September from $216 billion three years prior. The company has even grown sales during the pandemic: For the quarter ended in June, they rose 11% from a year earlier to nearly $60 billion, exceeding Wall Street expectations. Earnings surged to $11.25 billion.

Apple is not a growth stock. Period.



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