They are not just numbers. The stock quotes you see sliding across the bottom of the screen on CNBC represent per-share prices. Multiplying those prices by the number of shares outstanding gives a market capitalization for each company, and that figure, easily obtainable through thousands of sources, gives the true market value of a company. Those values are driven by market participants' perception of the risks and rewards involved in holding any given stock on a real-time basis.
That's why stocks don't "always go up."
To be sure, the long-term movement in the S&P 500 has been up, simply because the profits of its ever-changing 500 members (still not including Tesla (TSLA) , as we learned last week) generally rise. According to multpl.com, the earnings per share (EPS) for the S&P 500 totaled $41.32 in 1990 and last year, in 2019, totaled $140.62. So of course the market is higher now than it was then, but that still doesn't mean stocks always go up. They don't.
To limit the idiosyncratic moves caused by disappointing individual company events -- at this writing I am watching Slack Technologies (WORK) shares plunge after-hours Tuesday and kicking myself for not buying puts ahead of earnings, as I have done profitably in the past -- fund managers will tend to pile into the largest stocks. Those are often the most liquid names, and that is exactly the type of action we saw in the largest Nasdaq names this summer. Apple (AAPL) grew in stock price because...it grew in stock price. It is an unsustainable feedback loop, and the real losses are caused when the market re-focuses on the individual market capitalizations.
On Wednesday Aug. 19, Apple hit a $2 trillion market value. Is any company worth $2 trillion? Well, one was previously. Saudi Aramco was, or within a few million dollars, anyway, last December, soon after its initial public offering (IPO) on the Saudi stock exchange, Tadawul. If you are waiting for a "woe is me" tale here, read a different article, because Saudi Aramco (2222.SA) rose 0.6% in Tuesday's trading to a new all-time high. Once again, despite the massive selloff in crude oil prices, Saudi Aramco sports a market valuation of $2 trillion.
Apple shares continued to rise through the $2 trillion mark, peaking at an all-time high close of a split-adjusted value of $134.18 on Sept. 1. On Tuesday, AAPL closed at $112.82, a stunning reversal in the course of four trading days for the stock, which is a holding of Jim Cramer's Action Alerts PLUS charitable trust.
At its peak Apple was trading at more than 33x the Street consensus for its fiscal 2021 earnings, which I am seeing at about $4.00 here on Wednesday. A quick check of Zacks.com shows that this is a ratio that is elevated versus recent years' levels; 33x is about double the price-to-earnings (P/E) ratio AAPL was afforded from 2017-2019.
Something's gotta give. Either AAPL has a capacity to produce earnings growth well in excess of Street estimates (doubtful) or that P/E is going to need to come down to historical levels, or at least levels that are more in line with the broad market's current forward P/E of about 22x. Adjusting for its recent four-for-one stock split, AAPL earned $2.54 in the first nine months of fiscal 2020. So, the leap to a full-year 2021 earnings figure near $4.00 (Zacks has a consensus of $3.87 with a range from $3.17 to $4.50) implies a 20% EPS growth rate in fiscal 2021 versus fiscal 2020.
Estimates for AAPL aren't overly pessimistic, or "crazy low'' or whatever phrases the kids are using these days. This is an extremely well-run company from a financial standpoint. It wouldn't surprise me if AAPL outperformed quarterly estimates for the next several periods on both the top and bottom lines. That's how the game is played, and the folks in Cupertino play it well.
Peter Oppenheimer, Apple's CFO from 2004-2014, was a master at exceeding Wall Street expectations, and his successor, Luca Maestri, obviously has learned his predecessor's methods.
Consequently, the only question for Apple, Amazon (AMZN) and yes, even Tesla, is, "What multiple do we apply to those earnings?" That's where geeks like me have a huge advantage over "Davey Day Trader" Portnoy and the frightening cohort of non-experts who give stock advice on Twitter.
Numbers matter. In the recovery from a crash, as we had in February due to Covid-19, multiples will always appear stretched, but it is September now and the Covid lows are a distant memory. In the throes of August's Nasdaq Rapture, the market was pricing in earnings growth scenarios that either won't (Apple) or can't (Tesla) happen.
Corrections occur to remedy these excesses. I have no idea when the current one will end, but I am not buying tech stocks today, and I am quite certain they won't "always go up." Be careful.