Daily Update

Daily Debrief 11/19 – Are Valuations Stretched? Absolutely. But Relatively?

Consumer Balance Sheets are improving: A new report from the Federal Reserve Bank of New York showed credit-card balances declined by $10 billion to $810 billion in the third quarter of the year. This, after a $76 billion decline in the second quarter, is the steepest drop since 1999. The big falls reflect both lower levels of spending due to the coronavirus pandemic as well as an effort by consumers to use extra cash to pay down debt. Overall household debt rose by $87 billion, or 0.6%, to $14.35 trillion in the third quarter compared with the second quarter. This is primarily due to mortgage activity underpinning the red hot housing market as well as auto purchases and a millennial favorite, student loans. Continue to pay off that credit card debt, millennials, maybe buy a house at record low rates too.

Apple – “Look we are a kind monopoly”: Apple is cutting the fees charged to most developers who sell software on services on its App Store by half. Per Bloomberg: “The company is lowering the App Store fee to 15% from 30% for developers who produce as much as $1 million in annual revenue from their apps and those who are new to the store.” This decision won’t affect major apps like Netflix or Spotify.

App Store - Apple
Apple Apps

From Goldman Sachs, “SensorTower data shows that total revenue to developers sized ~$2.9m and larger from Apple’s FY20 of App Store sales is ~$43.5bn. We estimate that this represents about $16.9bn of revenue for Apple or ~92% of total App Store revenue for Apple over that period. This implies that sub $1m developers represent something less than 8% of total App Store revenue but the size of the pool of revenue from $2.9m down to $1m is not available.”

Apple claims this is a way to incentivize smaller developers to invest in their businesses amid the pandemic by using their new savings. Apple has faced ongoing scrutiny from government regulators and developers about the percentage of revenue it takes for App Store purchases. We think this is a response to that scrutiny to buy some good will, especially to anti-trust regulators such as the ones involved in the ongoing investigation in Europe.

Stretched Valuations: With >20x Next Twelve Month (NTM) P/E for the S&P 500, current valuations are in the 90th percentile historically. Given the pandemic, extraordinary measures of supportive monetary and fiscal policies were enacted that otherwise would not have been. As the economy recovers, these policies will remain in place to support the recovery. These are the forces that are underpinning this absolute high level of valuations. We don’t expect rates to rise until 2025, if ever meaningfully again.

Source: FactSet, Compustat, IBES, Goldman Sachs Global Investment Research

However, relatively given these circumstances, valuations don’t look as stretched. In this context, GS compares the S&P earnings yield vs corporate and government bonds. S&P valuations are currently in the 40th percentile for the index compared to historical levels, and 20th percentile for the median stock in the index. The five largest stocks in the S&P are currently trading around a 29x 2021 estimated Earnings per Share (EPS), compared to 18x for the other 495 constituent companies.

Source: FactSet, Goldman Sachs Global Investment Research

Staples, Materials, Utilities, Health Care, and Financials are all trading well under their median historical relative P/E multiples. Discretionary, Energy, Info Tech, and Industrials are all well above their median P/E multiples. What will it take for Financials and Health Care to creep back up to their historical medians?

Source: FactSet, Goldman Sachs Global Investment Research

FAAMG S&P dominance: The top 5 largest stocks have returned +48% year-to-date compared to only +4% for the remaining 495 companies. In fact, the remaining 495 companies would be flat to negative if not for the recent rally. We think there is a lot of opportunity in the remaining 495 companies based on a robust economic recovery in 2021 and beyond.

Source: FactSet, Goldman Sachs Global Investment Research

This recent performance in FAAMG has contributed to the record concentration of market cap in the 5 largest stocks as they account for 22% of the S&P 500 compared to a historical average of 14%. Is this sort of market cap concentration among a few names sustainable long-term? History says no. However, will a hypothetical de-concentration occur because the rest of the index catches up or the top 5 trade down?

Source: Compustat, Goldman Sachs Global Investment Research

Lockdowns Work: You can argue the ethics and government overreach of lockdowns, but one thing that can’t be debated is that they overwhelmingly work. France and Spain have turned a new corner since lockdowns were first announced 3 weeks ago.


Germany and the UK, having soon followed France’s, where the situation was the most dire in the EU, lead, are also beginning to turn the corner. This approach is indeed the primary cause of these countries beginning to regain control of the situation.


Tweets and Charts we like:

NIO has been the main beneficiary but choosing Chinese EV’s is like getting a lottery ticket

Not all low multiple stocks deliver great returns, good portion of the time low multiples are justified.

Owning Microsoft throughout the bubble of 1999 was painful. Is the stock at a similar valuation bubble? Would argue Ballmer wasn’t a great CEO, though.

Are oil companies due for a break-out? Take a look at this oil company ETF chart.

Algorithms trading on headlines

That’s your millennialmkts daily debrief, thanks for reading and good luck!

Posts are not investment advice or endorsements.

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