Giant private companies scheduling their IPO means money is gushing around in markets. If SpaceX, OpenAI and Anthropic are all planning trillion-dollar IPOs – the biggest in history – greed is outpacing fear.
Price-to-earnings ratios? As the next chart shows, they are high compared to history. Very high.
Things are looking very frothy. (Source: Highcharts.com) ·Getty
But take care: Patterns can deceive. Not all firms at the top have absurd price-to-earnings ratios. Nvidia, the chip-maker that is the world’s most valuable company, is simply a cash-making machine at the moment. Its forward price-to-earnings ratio is comfortably lower than the market. It is doing what all businesses dream of: making wild profits on large volumes. Its valuation, over US$4.8 trillion, seems not unjustified. At least until chip demand dries up.
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Tesla, by contrast, is priced as though Chinese EV competition does not exist, with a price-to-earnings ratio, rather absurdly, of over 300. If it had instead the price-to-earnings ratio of Nvidia, it would be valued at around $100 billion – similar to Starbucks – not $1.2 trillion. If you are looking for high-profile downside risk, you find it here.
Tesla has long been an outlier that has defied conventional Wall Street wisdom. (Source: Jason Murphy) ·Getty
By the way, have you noticed how the relentless march of asset inflation means we now regularly speak of trillions? A decade ago billions was an intriguing enough concept that it became the name of a hit HBO TV show about investors. Now billions are so commonplace we package them into groups of a thousand: One thousand billion is a trillion.
Will we become fluent in quadrillions soon? Or will a big crash push those next three zeroes off into the distant future?
Will a market meltdown be soon? Big? Both?
The run up in stock prices will end eventually. Booms always do. But will the end be soon? Will the crash be big?
Certainly the scene is crowded with players. It reminds me of the end of a play, when the characters all gather ahead of confrontation and a climactic event.
SpaceX will launch on US markets tomorrow, with plenty of Aussie retail investors jumping on for the ride. ·Getty
We have the Trump administration dropping bombs and shutting Straits, the Federal Reserve plotting another rate hike (probably only one), war dragging on in Ukraine, race riots in the UK, plus the AI industry moving so fast it might eviscerate the jobs market. It is not hard to imagine concern tipping over to panic.
When markets crash, that can cause financial problems that soon make the real economy shiver. Companies slash workers. Construction projects are shelved. Loans can default. Credit can dry up so bills don’t get paid. Some companies that were already marginal realise they won’t make it, and they fold. The result is a smaller, weaker economy – in America and in Australia.
We talk about the US market as an extension of the Australian market these days. Aussies are deeply, deeply invested in US stocks. We own around a trillion worth. There’s that word again, and that’s just stocks. Australian investors (mostly super funds) also now hold US bonds, private equity and infrastructure assets. The ASX is just not large enough to contain our burgeoning wealth, so our tendrils now wrap around assets worldwide. It’s a new phenomenon – what happens in the S&P500 matters to us. Big time.
US markets are popular because they are the main way we can get exposure to the big moving parts in the world economy. Australia’s stock market is stable by comparison, up just 0.2 per cent over 12 months. It would be down dramatically were it not for BHP. That dull, old, grandpa-coded stock has added $110 billion in market capitalisation this year alone, netting out losses in some much hipper, more tech-adjacent names. CSL, Cochlear, REA Group and Xero have lost $100+ billion in market cap between them this year.
The ASX has not been fun for a lot of investors this year. (Source: ASX) ·Getty
In our market, mining pays and tech (such as it is) doesn’t seem to. We need the Americans – and all their risks – to get exposure to the upside. With upside, of course, comes downside. You find Nvidia chief Jensen Huang in America, but you also find Tesla supremo Elon Musk.
If you notice the chart above, a lot of the risk in this market is rooted in that one man. His car company is the one with craziest valuation in the markets. And his space/AI company – which loses vast sums each quarter – is about to splashdown in public markets, spreading investor capital thinner. Which means the usual patterns we watch to call a market top might not apply this time.
Is it the top? The best way to tell may be to watch Musk.
