Where is the Direction in US Markets?

Frankly, there is a bit of confusion regarding the United States markets. Mine got mixed up last week too. Despite the excellent inflation figures, the FED said we will not reduce interest rates. Thereupon, the stock markets continued to rise. We hit all-time highs in both the S&P 500 and the Nasdaq 100. Friday closed with All Time High. But despite this, fear prevails in the markets. There is such an interesting confusion. As of last Friday's closing, I was a little confused, too. So this weekend I sat down and went over as much data as possible to find out why the markets are spooked. Are they right or continue the bull. I thought about all this. Now I will tell you all this. Of course, what I am about to tell you is not investment advice, but I am sure there is data that will interest you.

First, let's take a look at what's happening in the markets. Nasdaq 100 closed the week at an all-time high. Thus, the one-year increase reached 30%. There has been a serious increase since the beginning of May. If you remember, I was very positive about May and June. June is already going well right now. S&P 500 is no different, with a yearly increase of 26.74%. The rise accelerated since May. Like Nasdaq, it closed the market at its all-time high. Volatility, that is, the fear index, is also at the bottom, which is actually a positive thing. Because it means the market is looking at the future positively. Volatility has decreased. It has also fallen to its all-time lows, almost down to 13.07. So far everything is positive, there is one negative issue, but the markets are in fear. Fear and Greed Index is an index published by CNN and it looks at how motivated stock marketers are at the moment. They are in a state of fear, this is neutral greed, as it moves towards extreme, excessive greed accumulates in the market.

How can it happen now? On the one hand, we are at All Time High levels in many indices, and on the other hand, the market is afraid. The main reason for this is imbalance. Imbalance means that certain stocks grow too fast and others do not follow suit. For example, when we look at the Russell 2000, which is the main index of small stocks, one year's increase was only 6.26%, the others were around 30%. It has been very rare in history that these two fell out this much. This is what the market is afraid of and wonders if a few stocks like Nvidia or Apple are just pulling the market upwards. Are big problems starting to accumulate somewhere underneath? Will the market crash? All of these scare the market. So, when we look at the numbers like these, the market is more right to be afraid. For example, when we look at the performances since the beginning of the year, Nvidia increased by 121% and accounted for 32.26% of the increase in the S&P 500 alone. So, if Nvidia had not increased, almost 1/3 of the increase in the S&P 500 would not have occurred. Microsoft increased by 10.79%, 6.94% of the increase in the S&P 500 comes from there. Meta increased by 32%, 5.87% of the increase in S&P comes from there alone. Unfortunately, there is a decline in our Tesla - 28.33, it has pulled the S&P 500 back a little since the beginning of the year. However, Apple is on the rise. But this data is May 31 data.

As you know, Apple has actually risen a lot since then. After the balance sheet came last week, he was not taken into account here. But it is clearly seen that when we look at it as of May 31 and Nvidia continued to rise thereafter. Nvidia actually accounts for one-third of the rise in the S&P 500 alone. These are what we call megacaps, namely Magnificent 7: Google, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, and when Netflix is ​​added to these, they become megacaps. Netflix has fallen a bit out of popularity. Although Tesla also has some problems. But when we look at it, we see that their market values ​​have increased continuously since 2013 and are currently breaking records. As of June 14, the market value of 8 companies has reached 15.3 trillion dollars. Among these, the total of Apple, Microsoft and Nvidia approached 10 trillion dollars. In other words, these are truly abnormal figures and their share in the S&P 500 is increasing. We see that these 8 companies now account for 30% of the total value of the S&P 500. It was at 15% until 2018. Then at one point it reached 25%. They went down in the 2021 crisis and are at the top again. What we call the total S&P 500 is actually 30% It consists of only 8 companies, of which Tesla is not doing very well. Netflix is ​​not doing so well either.

In other words, what drives this here is basically Nvidia Yardeni Research, which says that when we look at the S&P 500, there are growth companies here, for example Crowd Strike. It was included in this index last week. Compared to those companies, Megacap's share is 52.6%, and when we leave it aside, it is 29.8%, so S&P 500 basically means our 8 largest companies. Well, in this case, what we should not ask ourselves is whether these megacaps are too expensive. Because if megacaps are too expensive, a sale in them could drag the entire stock market downwards. Actually, some interesting results emerge here. For example, when we look at price divided by sales in megacaps, they are very close to their all-time peak. But it looks like they still have a ways to go. On the other hand, when we look at price divided by earnings in megacaps, they are actually far behind the peak in forward price earnings. Now, how can it be that price divided by sales is so close to the peak, while price divided by earnings, both forward-looking ones, are so far behind the peak?

There is only one reason for this. These companies are now more determined. This means that they are more determined, especially since they use artificial intelligence more effectively, giving up the excessive staff increase during 2021 - 2022 and making significant staff reductions. For example, when we look at it this way, while the forward price gain of these companies was around 38 in 2020, it is currently around 28 - 29. So, of course, it is not possible to say that it is cheap at 28 - 29, but it is well below 38 - 39. Therefore, when we look at these companies in terms of price and earnings, we cannot say that they are super expensive or that a big bubble has formed. Yes, they are not cheap, they are above historical averages, but they are not close to those extreme peaks experienced in 2020 - 2021. Because companies' future profitability expectations are constantly climbing. Well, if we take the megacaps out of the picture, when we look at the valuation of the S&P 500, for example, the total of the S&P 500 is at the level of 2.7. We are at 2.2 in the S&P 500, which is very close to its peak, where we have removed the megacaps. Still pretty close to the top. So, when megacaps are taken out in this price divided by sales, the S&P 500 is still expensive. But there is another, more interesting indicator.

The remaining companies of the S&P 500, from which we excluded the megacaps, are very close to the tops at the price divided by earnings level. The overall S&P 500 peak in 2020 is currently 20.7 and around 21 - 22. So think of it as 10% behind the peak. When we remove our megacaps from S&P 500, we are at 18.1. At its peak, it was around 20.5 - 21. In fact, megacaps are cheap, that is, when divided by price, they are all close to each other and expensive. But when we look at the price divided by earnings, megacaps are still cheap. The big 8 companies are still cheap and I can tell you Nvidia looks pretty cheap. It's still expensive there, don't get me wrong, these are all very expensive stocks, but I'm talking relatively. Meta doesn't seem very expensive again. Apple is not at its historical peaks, so when we look at it this way, this table says that there is still a way forward in megacaps. The peak of the bubble between 2020 and 2021 is 38. We are currently at 27 - 28. So, wherever we look at it, there is a 25% - 30% opportunity in this intermediate region.

I just checked, the market has not opened yet, but today, it looks like big companies like Apple and Nvidia will go even higher. It is not possible to read the future of the stock market now, but I can say this. It's possible that the movement in the megacaps stops somewhere and spreads downward, that would be super healthy. But S&P 500 companies are not very cheap for such a spread. I can't say the same for Russell. Small stocks are pretty cheap. However, it is interesting where the money coming out of here or the new money entering the market will be directed. My guess is that megacaps will go a little higher. When the megacaps approach 33 - 34, maybe not towards the bubble, but towards the bottom, that is, when the price divided by earnings approaches 33 - 34, some money will flow to the small ones from the S&P 500. Their price gains will be taken slightly upwards. Then I read the table as if it would be Russell's turn. Because somehow the peak seen in the American stock markets is once again being challenged, and there are still many excuses in the market to further the price gains of these large companies, especially due to the great hope brought by artificial intelligence. But if there is a sudden decrease in these megacaps, for example, if it is predicted that there will be a downward spiral in Nvidia's microchip sales, I think all these price earnings averages will decrease towards the 20s in megacaps.

This could mean a 30% pullback from the current peak no matter how you look at it. I don't really expect this. Because positive things are still happening on the artificial intelligence side. Apple's AI conference last week was a big one. There we saw that artificial intelligence is now coming to our mobile phones. This will again increase the demand for microchips. So I believe this will continue. When we look at it in this context, I think larger companies will be luckier, at least for a while. This is, of course, an issue that makes me sad. Because I invested a lot in IWM, small stock indices. I always try my luck. I can't get anywhere, but it looks like we won't get anywhere for a while. Because I think there is a little more upside in megacaps. Of course I could be wrong, but for now the table works that way. Because megacaps' future profit expectations are also great. The increase in net profit margin expectations is increasing incredibly rapidly. When we leave that out, there is not much profit increase expected for the S&P 500 in general or if megacaps are excluded from the S&P 500. In this case, when we look at the future, the price earnings ratios of megacaps may decrease even more due to the new future profit margins. At least that's what the market thinks right now.

Another interesting data is that incredible money is flowing from abroad to America, especially to stocks. Records are being broken in investments in stocks from abroad, and we are at the peak. If you ask where this money is going, I think most of this money is going to megacaps. Because foreign investors, especially amateur investors, do not sit down and examine small American companies. They say Nvidia is going up and we want to join it. In this context, new predictions started to come. For example, Goldman Sachs says that we think we will reach 5600 in S&P 500 at the end of the year. They present this as the baseline, that is, the basic prediction. Downwards to 4800, there is a risk of recession. But we can go up to 6300. He says megacaps will drag us there, and that's my guess. I believe megacaps will drive us upward.

The table tells us that, roughly speaking, megacaps still have a long way to go. Companies such as Crowd Strike and some cyber security companies that have been dragged on the path opened by those megacaps still seem to be able to go up. They are because they are very connected to those giants or companies like SMCI. But unfortunately, I still cannot see anything incredibly positive for the rest of the stock market. Because the FED spoiled the game. If the FED reduces interest rates, the picture may change. Then some money flows to the remaining companies outside of this megacap, especially in the S&P 500. But more importantly, perhaps money will also flow into IWM into smaller stocks. I was thinking this might happen as of last week. But the FED spoiled our forecasts there. Some important data is coming this week. Especially the retail sale on Tuesday is important. It shouldn't be too strong. When it becomes very strong, the FED says that the economy is still very alive, we do not need to reduce interest rates. Also, unemployment applications come in on Thursday. We are waiting for both of them with curiosity, but other than that, there is no such critical data this week. There are some speeches by FED managers. I think they will take the market here and there.

We see such an upward trend in unemployment applications. The 1800000 limit has been exceeded in continuing claims. New unemployment applications also exceeded the 240000 limit. So here the upward trend deteriorates rapidly. I don't understand how the FED doesn't see this. So they say employment is still strong. However, employment degradation has been continuing here for a long time. I think retail sales will be positive. Because there is an increase in incomes in America. In other words, there is an increase in the income of employees. This could push retail sales up a bit. We want it to be both very good and very bad. If it's too bad, it's a sign of recession; if it's too good, it will scare the FED. Let's see, that's the data that will come tomorrow. By the way, when we look at it technically, this is the chart that interests me the most. The issue of where American 10-year interest rates are going was pushed past a long-standing support line here last week. If it breaks this line downwards, I guess that interest rates in the United States may fall below 4, and this is the natural thing to do.

In other words, as long as inflation data is consistently positive, interest rates in America will definitely go down. Even if the FED does not do so, the market will take the interest rate downward. In this context, I expect money to flow into American treasury securities in the coming days. This means: I guess that opportunities will increase in fixed income ETFs such as TLT. If it breaks down to 4%, reasonable returns can also be achieved in TLT. But FED managers are trying to keep this up with their speeches. Continuously because a 10-year interest rate below 4% could mean excessive relaxation in the markets. I know that many fund managers are telling their investors to buy treasury bills this week. Because they say we may not be able to get these returns again. He says that if inflation really goes down as expected and interest rates go down, those who buy long-term, high-interest bonds now will be very profitable. It seems reasonable to me that as of May, 90 billion dollars have entered ETFs in America. Of this, $60 billion went into stock ETFs, and $30 billion went into treasury paper ETFs, that is, fixed income ETFs. This shows me this curve. In other words, investors are increasingly convinced that interest rates will go down.

This is roughly the picture, so if I had to sum it up, I think megacaps look like they will continue. Although we may be surprised, unfortunately, I do not expect a serious movement in small stocks yet unless there is a clear interest rate decision from the FED. Because I have a lot of stocks there. Likewise, Bitcoin is actually negatively affected by these developments. Because bitcoin is seen as a small risky stock by the market. The market instead prefers to go and pile on Apple, Nvidia, Meta. It seems like an easier game to the markets and finally, the market seems to be able to break the interest rate on treasury bills below 4%. In this case, TLT may be a sweet investment opportunity, I do not give advice. I'm just saying what I see. If the market continues to push interest rates down even further, this will benefit the Russell 2000 etc., but I guess it's still there yet.

The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.

How do you rate this article?


Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.