1 overlooked signal that could avoid you losing money
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There’s no clear end in sight. The UAE said it had intercepted missiles fire from Iran. This is the first time the UAE’s missile alert system was activated since the US-Iran ceasefire started last month. Ships are still effectively stopped in the Straits of Hormuz. Energy prices continue to rise. President Donald Trump also announced “Project Freedom”, which he said US would begin bringing ships that aren’t involved in the conflict and are stuck in the Persian Gulf. Yet, amidst all these, the stock market continued to edge higher over the past month, with the S&P 500 up 9% Nasdaq is up 14% and DJIA up 4.9%. This overlooked signal tells me it’s now more than just a bull market. The S&P 500 Shiller CAPE Ratio now trades at 40x its cyclically adjusted PE ratio. This is just a few percentage points off the dot-com high. Tech companies are expected to leap in earnings growth this year pulled by the strong AI demand, despite the Iran War. In fact, when you’ve traditional companies like Allbirds Inc whose share price soared just after the footwear and apparel company said it will pivot to AI, it’s clear this is more than a bull market. You see, in this tricky market, I wouldn’t use the regular PE ratio that’s based on the last 12 months earnings of all S&P 500 companies. Why? During huge economic growth, companies riding on a tailwind generates high profit margins and earnings. As a result, this artificially lowers the regular PE ratio due to the high earnings growth. PE ratio is the stock price divided by its earnings per share. Remember: many companies cannot sustain record high profit margins indefinitely - due to competition and high capex requirements. Yet a market boom assumes record-high earnings and economic growth will last forever. Not true. Not true. Take a look at the past corporate profit margin as a % of US GDP since the 1950s. A record high profit margins precedes each recession cycle (grey line): Think the global financial crisis when banks were in a supernormal profit cycle. Already, we see tech giants’ free cash flow margins shrinking… The S&P 500 Shiller CAPE Ratio is calculated by dividing the current price of its S&P 500 by the 10-year moving average of its inflation-adjusted earnings. This helps to smooth out huge earnings cycles. Today, the Shiller CAPE Ratio trades multiple times higher than its historical average. As billionaire investor Jim Chanos mentioned on his X platform: "Look at mid-1998 to mid-2000, when S&P 500 profits rose 30%. Then look at the next twelve months when order books collapsed." Who knows when we’re at the apex of current AI boom. Just like the dotcom bubble when technology stocks account for a massive chunk of the stock market back then, the same can be said for today’s market. Sometimes, investing can be simple. Willie Keng, CFA Founder, dividendtitan.com P.S. Like this issue? Click HERE to join other dividend investors reading my DT Compound Letter. I send my regular letters to your inbox. |
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