Big US Stocks’ Q4’23 Fundamentals

Adam Hamilton     March 8, 2024     3129 Words


The big US stocks dominating markets and investors’ portfolios are soaring.  They recently wrapped up another quarterly earnings season, reporting some spectacular results.  Yet these huge market-darling companies are still extremely overvalued, deep into dangerous bubble territory.  Their incredible mounting euphoria fueled by some parabolic gains can’t last either.  So serious imminent downside risks abound.


As a lifelong student of the markets, I love earnings seasons!  Publicly-traded companies are required to submit comprehensive 10-Q quarterly and 10-K annual reports to the SEC, which are chock full of their latest and best-available hard fundamental data.  That illuminates how companies are really faring, cutting through the obscuring fogs of sentiment normally driving stock-price action.  This perspective is invaluable.


While 10-Qs have 40-day deadlines after quarter-ends, the way-larger and more-in-depth 10-Ks aren’t required until 60 days out.  So just last week Q4 earnings season ended, with the stragglers among the big US stocks publishing their official reports.  Last quarter the flagship S&P 500 stock index surged a hefty 11.2% higher to 4,770, leaving all of 2023 with massive 24.2% gains!  Were those fundamentally justified?


Traders either think so or don’t care.  So far in 2024, frenzied stock buying has intensified driving the SPX another 7.7% higher at best!  In late January it achieved its first record close in 24.5 months, which really supercharged popular greed.  That fueled the SPX powering even higher since, attaining 15 record closes in just 30 trading days as of early March!  Excited investors have rushed in chasing these fat stock gains.


All that left the S&P 500 and many of its dominant component stocks seriously overbought.  A week ago the SPX stretched 13.5% above its baseline 200-day moving average!  With US stock markets greedy and euphoric, way overbought, and super-overvalued, a major-selloff reckoning is inevitable and looming.  Trading at these extremes simultaneously, stock prices need to normalize soon to reflect their underlying fundamentals.


As always big US stocks’ latest Q4’23 results are important for gaming stock markets’ likely direction in coming months.  For 26 quarters in a row now, I’ve analyzed how the 25 largest US companies that dominate the SPX fared in their latest earnings seasons.  These behemoths commanded a stunning near-record 45.6% of the SPX’s total market cap exiting Q4!  Their latest-reported key results are detailed in this table.


Each big US company’s stock symbol is preceded by its ranking change within the S&P 500 over the past year since the end of Q4’22.  These symbols are followed by their stocks’ Q4’23 quarter-end weightings in the SPX, along with their enormous market capitalizations then.  Market caps’ year-over-year changes are shown, revealing how those stocks performed for investors independent of manipulative stock buybacks.


Those have been off the charts for years, long fueled by the Fed’s previous zero-interest-rate policy and trillions of dollars of bond monetizations.  Stock buybacks are deceptive financial engineering undertaken to artificially boost stock prices and earnings per share, maximizing executives’ huge compensation.  Looking at market-cap changes rather than stock-price ones neutralizes some of buybacks’ distorting effects.


Next comes each of these big US stocks’ quarterly revenues, hard earnings under Generally Accepted Accounting Principles, stock buybacks, trailing-twelve-month price-to-earnings ratios, dividends paid, and operating cash flows generated in Q4’23 followed by their year-over-year changes.  Fields are left blank if companies hadn’t reported that particular data as of mid-week, or if it doesn’t exist like negative P/E ratios.


Percentage changes are excluded if they aren’t meaningful, primarily when data shifted from positive to negative or vice-versa.  These latest quarterly results are very important for American stock investors, including anyone with retirement accounts, to understand.  They illuminate whether US stock markets are fundamentally sound enough to keep powering higher or are threatened with a major correction or bear selloff.



While the SPX includes 500 stocks, lately only the largest Magnificent 7 mega-cap technology ones really matter.  Exiting Q4, mighty Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta Platforms, and Tesla commanded an astounding 28.4% of the entire SPX’s market capitalization!  That equaled this benchmark’s bottom 398 components’ collective weightings.  These Mag7 giants exert absolute dominance over stock markets.


In 2023, the Mag7’s total market caps skyrocketed 74.4% to $12,095b!  That more than tripled the entire SPX’s 24.2% surge!  That vast outperformance has left the US stock markets stunningly bifurcated, with nearly all their gains driven by the Mag7.  That has forced professional fund managers to increasingly chase mega-cap-tech upside with outsized allocations, or risk their funds’ performances lagging their peers’.


Underperform too long in the money-management business, and investors will pull their capital which can quickly strangle and even kill funds.  So more and more investment has flooded into the Mag7, amplifying their enormous gains.  All day long on CNBC, Wall Street fund managers and analysts argue that this concentrated mega-cap-tech focus is righteous.  The big US stocks’ latest Q4 results sure buttressed that case.


Overall these massive SPX-top-25 companies reported top-line revenues surging 7.3% YoY to an all-time record high of $1,273b.  And the Mag7 achieved the lion’s share of that growth, reporting sales surging an outstanding 14.8% YoY to $525b!  The next-18-biggest US companies merely enjoyed way-smaller 2.6%-YoY Q4 growth, but that was skewed by my favorite retailer Costco.  My family and friends rave about its food.


My wife or I brave Costco every week to load up on fresh meat, fruit, vegetables, and bakery goods.  The quality and value of Costco food is outstanding, especially in these inflationary times pinching budgets.  In one of our circles of friends, mentioning Costco at barbecues is considered a party foul.  The reason is that starts people gushing about how awesome Costco is, often derailing other conservations underway!


COST was one of the best-performing big US stocks outside of the Mag7 last year, blasting 45.2% higher!  That catapulted it into the elite ranks of the SPX top 25.  Costco’s Q4 revenues climbed 6.2% YoY to a hefty $57.8b.  That displaced pharmaceutical giant Pfizer, which saw its Q4 sales crater 41.3% YoY to $14.2b as COVID-19 hysteria continues fading.  Without that swap, next-18-biggest sales actually fell 3.4% YoY.


Back to the Mag7, AI-chip-selling market-darling NVIDIA reported the most-extreme revenues growth ever seen in a big US stock.  NVDA’s Q4 sales skyrocketed an astounding 265.3% YoY to $22.1b, on soaring demand for its flagship H100 graphics processing units used extensively in large-language-model and generative artificial intelligence!  NVIDIA has Taiwan Semiconductor Manufacturing produce these in Taiwan.


Since demand is so high from hyperscalers like Microsoft, Alphabet, and Amazon ramping their cloud AI infrastructure as fast as they can, NVIDIA can sell H100s at epic premiums.  Wall Street analysts have estimated H100s cost NVIDIA about $3k to $4k each to manufacture, but can be sold from $25k to $40k!  So the getting has sure been good, but such extreme margins can’t last long since they attract big competition.


NVDA’s AI offerings are essentially upscaled chips used in high-end consumer-PC-gaming GPUs.  Other chipmakers are racing to modify their products to excel in AI’s enormous parallel processing.  Even some hyperscalers are designing their own AI chips.  So demand for H100s will wane as initial AI buildouts are finished, and future generations of NVIDIA’s AI chips certainly won’t command such crazy gold-rush margins.


Not only did the SPX-top-25 stocks’ revenues only grow last quarter because of the Mag7’s dominance, but big US stocks’ earnings look worse.  Those beloved mega-cap-tech giants’ Q4 profits rocketed up an epic 73.4% YoY to $121.5b!  While all the Mag7 posted great results with the exception of Apple’s slowing growth, NVIDIA again led the earnings surge.  Its profits soared a moonshot 768.8% YoY to $12.3b last quarter!


NVDA’s gross margins ran a shocking 76.0% in Q4’23, off-the-charts high for any big company!  For comparison Costco’s cutthroat grocery business had 3.4% gross margins.  COST exists to pass along its big wholesale-buying savings to its members, and membership fees accounted for 68.1% of Costco’s small $1.6b of earnings last quarter!  NVIDIA is a huge anomaly thanks to this manic rush to build out AI models.


The next-18-biggest US stocks actually saw Q4 earnings slide 2.4% YoY to $96.6b.  That is an ominous portent for US consumer spending which is necessary to drive corporate profits.  The more inflation bites into Americans’ strained budgets, the less discretionary spending they can do.  The SPX top 25 produce plenty of great goods and services we want, but also plenty we don’t need or could easily live with less of.


Actually corporate profitability outside of that Mag7 aberration is much worse thanks to Warren Buffett’s gigantic Berkshire Hathaway investment conglomerate.  Accounting rules force it to flush unrealized stock gains and losses from its vast holdings through its income statement each quarter.  This drives Buffett crazy, he often rails against resulting vast artificial volatility in BRK’s profits.  Q4’s unrealized gains were huge.


With the SPX surging 11.2%, Berkshire reported a staggering $36.8b of “Investment and derivative contract gains” in Q4’23 which funneled directly into its bottom-line earnings.  Without those, BRK’s profits last quarter crater from $37.6b to just $0.8b!  Adjust out the comparable Q4’22’s unrealized gains, and those normal operating profits from Berkshire’s vast stable of companies actually plunged 79.0% YoY!


Since Warren Buffett has invested in such a broad array of companies, BRK’s operating performance probably tracks the US economy more closely than any other big US stock’s.  Backing out those huge unrealized stock gains from Berkshire’s Q4’23 and Q4’22 results, that drags down the entire next-18-biggest SPX companies’ Q4 earnings to just $60.5b.  That’s actually down a quite-shocking 31.3% YoY!


The oil supermajors Exxon Mobil and Chevron accounted for a sizable chunk of that, with their total profits plunging 48.2% YoY to $9.9b.  Those earnings are highly leveraged to oil prices, and benchmark US crude’s average fell 4.9% YoY to $78.63 per barrel across those quarters.  But even if XOM and CVX earnings had held steady, without BRK’s unrealized gains the next-18-biggest stocks’ earnings fell 20.8% YoY.


Excluding the Mag7 phenomenon, corporate profits are dropping as Americans face increasing budget pressures.  Prices are way higher for things we have to buy like food, shelter, insurance, and medical expenses.  That leaves less money to buy big US corporations’ many other goods and services.  And if earnings are deteriorating, should the S&P 500 be way up at record highs?  There’s a gaping disconnect here.


And despite their spectacular Q4 results, even the Mag7 aren’t immune from less money to spend.  While mighty Apple eked out 2.1%-YoY sales growth last quarter, the preceding Q3’23 was the fourth quarter in a row its top-line revenues declined annually!  iPhones last much longer than Apple’s yearly releases, so people can easily delay upgrades a few years.  Ironically Amazon is facing mounting competition from China.


Rather than buying Chinese-produced consumer goods from Amazon, an upstart website Temu is selling them to Americans directly from Chinese factories at way-lower costs.  That cuts out Amazon and its middlemen, saving lots of money on the same Chinese goods.  Temu’s popularity is exploding as Americans become aware of it, including from Super Bowl commercials.  My wife and her friends rave about it.


Alphabet and Meta rely almost exclusively on advertising from businesses.  But as consumer spending slows hitting profitability, advertising spends are the first thing scaled back.  That is true for these biggest US stocks advertising on the Super Bowl down to small businesses buying Google search ads.  Even Tesla’s growth is in jeopardy as demand for expensive battery cars has been weakening with consumer spending.


So while the Magnificent 7 mega-cap techs’ sales and profits have been spectacular, they certainly aren’t immune from slowing sharply or even falling.  This is a serious risk to stock markets totally dependent on ever-increasing capital inflows into this handful of already-absurdly-humongous stocks.  This writing on the wall is probably understood by Mag7 upper managements.  Even they are growing more conservative lately.


One big reason the Mag7 stocks have soared so high and long is their massive stock buybacks fueled by their huge profitability.  Back in Q4’22, those ran $48.4b which was 69.1% of quarterly earnings.  Yet in Q4’23 as profits skyrocketed 73.4% YoY to $121.5b, the Mag7 kept their stock buybacks flat at $48.9b making for just 40.3% of profits.  Why hoard cash unless managements fear these gravy days are numbered?


While the SPX-top-25 stocks put up fantastic Q4 results thanks to the mega-cap-tech market-darlings, these lofty stock markets are still far too expensive.  Their average trailing-twelve-month price-to-earnings ratios exiting Q4’23 ran 38.2x, deep into dangerous bubble territory that starts at 28x!  Historically over the last century-and-a-half or so, big US stocks have averaged 14x fair-value P/Es and bubbles start at twice that.


And despite their colossal revenues and earnings and great ongoing growth, the Mag7 stocks remain way more overvalued than other big US stocks.  They averaged crazy 50.5x P/Es leaving Q4, which soared 55.4% YoY from the end of Q4’22!  That means nearly 3/4ths of mega-cap techs’ 74.4% market-cap gains didn’t result from better fundamentals, but multiple expansion.  Historically bubble valuations never last long.


Stock prices must ultimately reflect some reasonable multiple of their underlying corporate earnings.  So paying too much for any stock near record highs radically increases odds of suffering subsequent losses as it inevitably mean reverts lower.  Imagine finding a great house on a nice street with similar $500k homes, but then paying $1,000k+ for it.  Buying anything at greed-drenched mania-inflated prices is foolish.


NVIDIA is the poster child for this AI stock bubble’s latest record-breaking surge.  In my line of work, I’m asked about the stock markets all the time.  In recent months, NVDA has dominated social stock-market conversations.  People either just bought it or say they will soon, its universal popularity one hallmark of a fleeting speculative mania.  No matter how strong its Q4 fundamentals proved, NVIDIA is leading one today.


Despite last quarter’s revenues and profits skyrocketing an amazing 3.7x and 8.7x from Q4’22, mid-week NVDA was still trading at a crazy 36.2x trailing-twelve-month revenues and 74.1x earnings!  This beloved stock is obscenely expensive by any relative measure, and ludicrously overbought.  NVDA stock has inarguably shot parabolic, launching 27.9% higher over this last month and 84.8% during the past two!


On Wednesday’s data cutoff for this essay, NVDA was stretched a stupefying 80.0% above its baseline 200-day moving average!  That means it has rallied extraordinarily fast and far, which is always followed by a symmetrical collapse.  Investors forget NVIDIA was a hyped market-darling in November 2021 too on cryptocurrency-mining demand for its GPUs.  Late that month NVDA shot a similar 76.1% over its 200dma.


Then like now, Wall Street analysts were falling all over themselves justifying demand for NVIDIA silicon as being the new normal.  CNBC was full of fund managers arguing why NVDA’s massive revenues and earnings growth would continue.  They said valuations didn’t matter, because NVIDIA was growing so fast its profits would catch up to its stock price.  Yet that proved peak euphoria when NVDA was universally adored.


Over the next 10.5 months, this stock cratered a brutal 66.4%!  You read that right, this same NVIDIA plummeted by 2/3rds on a roughly-parallel small 25.4% S&P 500 bear market.  Stocks and sectors bid up to extremely-overvalued levels during popular speculative manias soon symmetrically collapse as that greed burns itself out.  Once all available near-term buyers are sucked in, only sellers remain and stocks crash.


Even if NVIDIA could maintain these extreme H100 AI-chip selling prices along with Q4’s huge revenues and epic profitability, today’s stock price is still at least double where it ought to be historically!  NVDA’s stock-price trajectory in recent years uncannily matches that of the 2000 internet bubble’s notorious Cisco Systems, which utterly crashed afterwards.  Vertical parabolic speculative manias always end badly.


Bear markets inevitably follow such blowoff tops, led by these same Mag7 mega-cap techs.  Between October 2021 to December 2022 surrounding that last mild 25.4% SPX bear, they averaged ugly 54.6% losses!  Despite their spectacular Q4’23 results, investors need to stay wary of this bubble popping any time.  They need to ratchet up their trailing stop losses and prudently diversify their Mag7-heavy portfolios.


That includes allocating some capital to counter-moving gold and its miners’ stocks.  Despite investors wanting nothing to do with gold like usual during euphoric stock bubbles, it is actually powering to new nominal record highs!  That is amazing with identifiable investment demand dead.  As gold forges higher into record territory and these lofty US stock markets roll over, gold investment demand will come roaring back.


That will really accelerate gold’s latest upleg, generating growing bullish financial-media coverage which will attract in ever-more capital.  Every investor needs some modest allocation in gold, even just 5% really stabilizes overall portfolio returns.  American stock investors had a piddling sub-0.2% allocation entering March, implied by the ratio between US major-gold-ETF holdings’ value to SPX stocks’ collective market cap!


The gold miners’ stocks are the biggest beneficiaries of higher gold, with their earnings and stock prices really amplifying its gains.  Yet despite gold’s record surge, the gold stocks have languished way out of favor near deeply-undervalued and seriously-oversold lows.  Many could easily double to triple during this coming year!  So why not pare back outsized Mag7 allocations and shift a little capital into dirt-cheap gold stocks?


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The bottom line is the big US stocks recently reported some spectacular Q4 results.  Led by the beloved Magnificent 7 mega-cap techs, revenues and earnings soared.  But adjusted for a couple key distortions, the rest of the big US stocks suffered profits falling considerably.  Pinched by inflation’s festering high prices, Americans have less discretionary income left to buy the goods and services these corporations sell.


Deteriorating earnings are really ominous with valuations already deep into dangerous bubble territory in this popular speculative mania.  Even the Mag7 remain incredibly expensive despite their massive sales and profits.  That portends an imminent selloff reckoning, led by market-darling NVIDIA which has shot parabolic.  Investors need to start diversifying their tech-heavy portfolios, including adding modest gold allocations.


Adam Hamilton, CPA     March 8, 2024     Subscribe