Stocks Aren't as Expensive as You Think | WAYT?

0:15Michael Batnick:Here we are. There they are. How are you boys doing? Let's go. Fantastic. Excited. All right. It is Tuesday, September 8th. We are live at five as always. My name is Michael Batnick, and I am joined by Sean Russo. Sean, introduce yourself. Say hello to the audience. What's up, guys? And, of course, Chartkin Matt, who needs no reintroduction. Chart, say hello. Hello, everyone. Great to see you guys. Why are they here? Well, Josh is out today with a back. If there was an injury report, get into the NFL swing of the things. Josh has a back. Not going to reveal more than that. I myself dealt with back issues.

0:54Michael Batnick:Me too. Not fun. Oh, yeah? Yeah. During your playing days? All the time. Last month. Sean, flex a little bit. What did you do? You were a sport baller. I was a sport baller. I played football in North Dakota. Go Hawks. You got football guys here, Michael. You got D3 for me. We'll get to you. Sean, guard or tackle? A little bit of both, but tackle mostly. All right. D what? Was that D1? Yeah, D1. FCS though Chart, where did you play? Union College, Division 3, Liberty League Still Still not nothing Alright, so Josh I hope you're feeling better, get well soon Here's what we're going to get into tonight We're going to talk about, and we've got charts Out the ass, you would not believe how these boys Cooked tonight, we're going to get into the great Rerating and why some stocks Might not be as expensive as people think We're going to do a little bit of Peter Lynch's old adage, invest in what you know, why it's harder than you think.

1:59Michael Batnick:It works sometimes, sort of. We're going to talk about one, what I think is a sort of missing ingredient from this alleged stock market bubble. And then we'll get into Apple's$2 ,000 phone. We'll do a mystery chart and then we'll get out of here. But first, we've got a sponsor tonight. Gentlemen, what do we got? This podcast is brought to you by DBMF, the world's largest managed futures ETF. Feel like the world's changing fast? Imagine a strategy built to move when everyone else is standing still. Going long or short across global markets as the trends shift. DBMF is made to move differently. A single low-cost ETF offering genuine diversification even when stocks and bonds move together.

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3:24Michael Batnick:All right. Listen, I feel like I make it look easy. You guys were lumbering through that. Chart, you've got a throat. You're coming off a wedding, so you have an excuse. Sean, clear your throat mid-air. My fault. Sorry. All right. Good job. Let's get into it with... Matt, this is you. we're talking about a great re-rating. What are we talking about here? Yeah, yeah. So we're talking about the great re-rating. So the beginning of the year, I talked about the great broadening that was happening in the market. And so we had a lot of stocks that were going up that weren't necessarily the MAG-7. And now we have a new phenomenon, which is what I'm calling the great re-rating.

4:00So the first chart that I brought today, Duncan, can we throw this up? Is we're looking at the number of S &P 500 stocks with a 4P greater than 40. So these are the stocks that are like the most expensive in the market. And so as this line goes down, it means there's less stocks that are trading above a four times four P and look at it today. We have 27 stocks in the S and P 500, only 27 trading with a four P greater than 40. That's like marking past bear market lows. And we're within 2 % of all time highs. So that's, that's really incredible.

4:31Michael Batnick:All right. This is, you know, I was about to ask you like sort of a gotcha question. Not really chart off please for a second, then we'll come back to it. I was going to say, I wonder if this looked a lot different, if you included stocks that were, say, moving the forward PE from 40 down to 30. But it doesn't matter. That's not what you're trying to say. Chart back on. What you're saying, I think, is, holy shit, we only have 27 stocks in the S &P 500 with a forward PE of 40. We were at these levels, just 27 stocks, at the bear market low in 2022 and at the COVID low in 2020. Where is the enthusiasm.

5:08Michael Batnick:We're basically at all-time highs and every stock is getting cheaper. 100%. How can you talk about being in a bubble when you have the number of stocks with a 4p greater than 40 back to the levels that we saw in March 2020, when the market went down 30 % in October 2022, when we had that grueling bear market? I mean, it just doesn't make sense to me. What a killer of a chart. This might be, if you were to go in front of the judge, the bubble judge, and you had one piece of evidence. Is this exhibit A, pun intended? That's exhibit A right there. I like that one. But I looked at it also, Michael, nice little segue there, on a sector by sector basis.

5:48Okay. So, John, if we could do this next chart as well. Okay. So I made this valuation heat map. So what you're seeing is within each sector, the percent of stocks within various forward P buckets. Okay. So like, for example, Look at utilities. 81 % of utility stocks have a forward P.E. between 10 and 20. Okay, so that's how the chart is constructed. Now, first I want you to focus on tech. So, John, can we flip to the next one? Alright, so focus there. Look at tech. 38 % of constituents within tech have a forward P.E. between 10 and 20. The next most common band is between 20 and 30 times forward.

6:25Okay, so that's not crazy expensive for the growth we're seeing within tech. John, one more flip. okay now look at the average so on average across all sectors 52 percent of stocks are falling within within the 10 to 20 bucket in 4p so that's not crazy expensive what are your guys thoughts go ahead sean i the maybe this is a silly question to start out with is there just no companies with less than 10x earnings oh they're they're in there but like for example you know if you throw

6:56Michael Batnick:the chart back on these are probably real pieces of you know like there there are some like look at utilities 10 of those are trading below 10. you know there are some i was looking i was going through the data there's some like three four five six there yeah like michael said they're kind of like piece of companies but uh but they're they're very uh rare all right so curious go back to the tech one please all right so what this is showing is that two-thirds of all stocks in technology which is the epicenter of the stock market mania, air quotes, two-thirds of those stocks are trading below 30 times forward.

7:33Michael Batnick:And only one out of four are trading above 30 times earnings. All right. Pretty reasonable. Good stuff. What else we got? Oh, all right. A counterpoint. Sean, did you come up with this chart? Yeah. So I think we see a lot of counterpoints about complaining about the price of earnings and forward earnings. and they throw up the price of sales. So, John, if you want to throw up price of sales, this is the trailing price of sales, and it's at all-time highs. And this is the counter that a lot of people are saying. But in my mind, this is an inept argument. The counter to the counter. Counter to the counter that I put in.

8:09If a company turns more of each sales dollar into profit, its price of sales goes up, even if you're paying the exact same multiple. It's a miracle. For example, a business earning$2 on$10 of sales at 15 times earnings trades at 3x sales.

8:25Michael Batnick:Hold on. Go slower. I didn't know we were doing math here. Go ahead. So if you have a company that has$10 in sales and their earnings are$2 and they trade at 15 times earnings, that's 3 times sales. With you. If that$2 of profit turns to$4 on the same$10 of revenue, still with the same multiple, the sales multiple doubles, but the earnings multiple stays the same, which is what's been happening in this market. There you have it. All right. This next chart that we're looking at from Meb Faber via Deutsche Bank. What are we looking at here? This is their – what is this? Yeah. Yeah, so all right, so they looked back since, wow, this is since 1935, and they plotted the S &P 500 quarterly earnings, and they did it in a log scale.

9:15And so essentially what's shown here is this long-term channel that you're seeing, and we're starting to break above it. So this is from Deutsche Bank. U.S. earnings are breaking out of a 90-year channel on the upside, which is incredible when you consider the high-growth periods of the past. The debate will rage on as to whether this is a sustainable new plateau or an artificial period of AI-related elevated earnings. But if you squint at the chart, you can see the actual earnings are breaking out of the channel. It's not the projections. And my question to you guys is, what do you guys think?

9:49like is are we going to look back in 20 years and say ai marked the beginning of a new paradigm where earnings grow 11 annually for seven i'm making it up like is it is that too cute or what

10:05Michael Batnick:do you guys think i think there's a weird way to show earnings that's what i think there's a sort of a bizarre chart all right let me answer your question sean you answer the question what think? I don't think it has to be like a whole new paradigm forever. I think it certainly is a theme that we're going to experience for the next whatever. Like if we're going to put an inning to it, we did this last time. Like I would think we're in the first half of the innings, but I don't think it's going to continue on forever. Well, you boys know I'm a gaps get filled guy. So I think this is going to come back into the channel.

10:36Okay.

10:37Michael Batnick:One of the things that's remarkable about the current moment in time is the earnings growth. Now this is the debate that it's getting pretty tiresome, if I'm being frank. But the earnings growth is off the charts. And the counterpoint would be, yes, but debt, unsustainable, CapEx build out. This is not going to continue, which is why the market is not rewarding these stocks. This is why the PE is shrinking, because these earnings are not sustainable. I think that is probably consensus. That is what the market is telling you. The market multiple is 19x right now, excuse me, which is below the five-year median multiple.

11:22It's right at the average median over the last 10 years. So we're pricing in those fears of circular spending or non-stable earnings. Like that's priced in. That's why we're trading at 19x.

11:34Michael Batnick:We should have came with a PEG ratio, long-term PEG ratio. Can we do that chart? Yeah, we can make that. Yeah, we'll make it. Okay. So who made this chart about the earnings growth? This is my earnings growth chart. Walk us through it. So this is from Jim Bianca at Bianca Research. We're looking at quarterly year-over-year earnings growth. I'm sorry. It's Bianco. He is not a lady of the night. Bianco. Jim Bianco. Anyway, we're looking at quarterly year-over-year earnings growth, the S &P 500. and we're looking at just operating earnings in the blue and that gray bar that last q2 2026 gray bar is what the year-over-year earnings growth would be if you included the realized investments all of the other blue bars do not include it so two things i want to point out here thing number one we're coming off of what is already a pretty high base right one year ago four quarters ago earnings were already above average or right at average right so that's one thing.

12:34The other thing is the earnings growth is still incredible without the unrealized gains in investments. So like we're just at in a period of time where earnings are incredible. Sean,

12:44Michael Batnick:before we get to your next chart about that we're already at a high base, can you just throw it on one more time? Because I think I was confused and I think the viewer might be confused. The labels, the Q2 2026 earnings growth X NOI, they'll say the same thing, right? But my eyes are not deceiving me? No, yeah, you're correct. Okay. But what we're looking at here is the gray bar on top of the blue bar, that's if you include all of the non-operating earnings, all of the increases in the valuations of some of these privately financed companies that NVIDIA is investing in, for example. Is that right?

13:19Michael Batnick:Yeah, that's correct. Okay. So take that top off, that top gray bar, and it's still insane growth. Yeah. All right, next chart. This reminded me of a ChartKid Matt hitter from ChartKidMatt.com. The base matters. So if you look at earnings growth, this is S &P 500 year-over-year earnings growth for tech quarterly. And like I mentioned, the base, we are right now coming off of a average to high base. Same thing for tech, right? So if you look at the few quarters from 2020 into 2021, earnings growth was incredible because the base was so low from COVID, right? The comps were very easy. But if you fast forward to 2025, the earnings growth that we're looking at here, it's not off of a low base.

14:05It's actually off of a high base, which makes it all the more meaningful. Insanely improbable.

14:10Michael Batnick:All right. We're going to move on to the Peter Lynch thing. But before we do, I know what you're thinking. Wow, that's a snazzy shirt. You're right. So we did a collab with Tropical Bros. And we've got a new one dropping for future proof next week. We also have a woman's cut. So we made that available for inquiring minds. If you are at the festival and you want a chance to win one of these snazzy looking polos and they're quite comfy, come by the booth and we'll see what we can do. All right. So I was thinking about this. there are so many name brand stocks getting sent into outer space. So Matt, you made me a chart of some of these.

14:54Michael Batnick:This is my chart. Oh, hell yeah. All right. So the title is a bit cute. It says, do not invest in what you know. So before we go to this chart, Peter Lynch is probably really annoyed at this segment because he's been dealing with the shit his entire career since he retired. And he didn't just say blindly buy what you know. Okay. In fairness, he said, maybe think about what you consume on a daily basis, which I should have done in 2012 when I was eating Chipotle every day and think, oh, like I'm using this product, this service all the time. Maybe there are other people just like me. All right.

15:30Michael Batnick:With that caveat aside, holy smokes, chart on. There are so many names that we know and love to varying degrees getting wrecked. AutoZone in a 32 % drawdown. Domino's Pizza down 28%. Lululemon down 55%. Uber 28%. Nike down 50%. By the way, Nike's market cap is down to$56 billion. And it just cannot, cannot get off the mat. No bounce whatsoever. And finally, my beloved Netflix is in a 40 % drawdown. When you, chart off, please. When you guys see this and digest it, what is the takeaway? Sean, you start. When I was in high school, I first started looking at this types of stuff because like you see target and you see the ticker and you know it and you're aware of it.

16:22You see Nike and you're like, I know this brand, like I want to invest in it. I like their products. And like, it's a very simple way to invest in things. And I think with Peter Lynch, like he wrote a lot about it. The first book I read was a Peter Lynch book, invest in what you know, like I forget what stock he invested in, but it did incredible. And it was something that his wife used. And so it just it's intuitive, but obviously it doesn't work all the time. Chart. I started trying to put money in the market when I was, I think a sophomore in college.

16:55Michael Batnick:And so it's like 2024. This is this is like, this is like literally actually December 2019. Okay. And I, I had only bought individual stocks. Okay. I can almost remember it was like Procter and Gamble. I think Apple was in the mix, but you know, Coca-Cola, all of these know what you own. And I was reading the same books as Sean. I think the best thing that could happen to me is COVID happened. And these things got cut and like, you know, these stocks got crushed and I sold like a dumb ass. And it It was the best thing that happened to me because I knew these stocks and then I knew that just because I understood them and I might understand their business models, that didn't give me an edge.

17:37And I just started indexing. And for me, as a young person, it's actually been very helpful that some of these Know What You Own stocks have gotten cream because these are the things that I did own and they didn't work. And even though I was going to Chipotle every single weekend after football practice, the stock wouldn't go up. And like you say, Michael, the stock doesn't know you own it. I thought it did for a very long time. And it never did. And it went down. And I sold. And I started indexing. And it actually worked out. That's my take.

18:05Michael Batnick:I don't have this chart made. But McDonald's, for example, probably the ultimate buy what you know stock. If you look at a ratio of McDonald's divided by the S &P 500, which basically shows you how one is performing versus the other, McDonald's hasn't outperformed. since 2007 like it is crashing relative to the S &P unbelievable stuff Nike's at its same price since 2014 like it's how it has its own lost decade like it's incredible so you look at charts like this you say man this this is really really hard I'm just gonna not do this anymore and then you do it anyway at least I do can't help it that's right yeah we all do all right uh wait what Can I add one thing, John?

18:56Sure. Can you throw up the but also do invest in what you know?

18:58Michael Batnick:Wait, wait, wait, wait. Before we get there, I just want to say one thing on this. There was a – so Michael Burry was buying Lululemon, which seemed strange at the time. And then Lulu reported earnings last week, got smoked, and he revealed in a sub stack, which I was curious to read, but I really feel like spending$50 a month for Michael Burry. he said he's going to it's his biggest position which seems very curious and he wanted to aggressively add below 100 it never got below 100 but wait wait wait i want to jump in here yeah because i think like the general sentiment you know people put michael burry's tweets to say sell and they put them on an s &p 500 chart and it just goes up but like i actually do like i do listen when i see something like that like it does impact me as an investor it does I'm like, hold on a second.

19:54Maybe he's right. You know, like, it's very easy to just pass it off, I think. But, you know, I know he was right one time, and it probably impacts the way he thinks about things. But I do think that he's a smart man and probably has, you know, he could be right. That's all I'm saying is he could be right. On what, on Lulu or in general? On Lulu. No, not in general. On a specific stock. You know, it's like almost like so specific.

20:18Michael Batnick:Well, you should have kept that to yourself, but I'm only teasing. To varying degrees, we are all influenced by things that we hear other people say, especially people that have done incredibly well. I mean, obviously, that's part of the deal. All right, Sean. So on the other side, there's also things that you know that have worked extraordinarily well. Apple, for example. So what did you bring? Yeah. So you didn't ask for this. But this is a whole thing for me is that investing is difficult. Like we could start with Peter Lynch and say, invest in what you know, and then everything that you know doesn't do poorly.

20:54And then, so then, okay, is our new ironclad rule never invest in anything that you know? And the answer is no. Like we could have commenters coming in saying, hey, dummies, like go look at Apple, go look at Airbnb, right? Go look at Monster, like some Target, like some of the most well-known brands are doing incredible. So I think just the takeaway for me is that just because you know a brand and use their product does not mean that they're a stock that you should be investing in.

21:22Michael Batnick:Correct. There are no ironclad rules in the stock market. All right. So I am listening to a new book, 1873, and it was all about one of the earliest global economic, truly global economic and stock market booms about the Rothschilds and financing out the railroad build out, and not just about the railroads, but they go like geography by geography, and it's a good listen. And one of the key ingredients around every single mania bubble bull market whatever is fraud it always happens and i was talking to josh about this and i said where's the fraud and he said what are you talking about and i said save it for the show so i don't know what he was going to say but one of i think one of the points that he this is the first point that he made.

22:21Michael Batnick:Then I said, you find out about the fraud after, which is fair and obvious. But if you think about the last mania that we lived through, which was five years ago, 2020 was a legit mania. And I think many people said in real time, this is nuts. Price to sales ratio, how many stocks were trading with the price to sales ratio above, I don't know what the crazy number is above 30. I mean, it was nuts. So as I have this topic in the doc, some new shit has come to light. All right. Forget about the Mark Walter thing, because while that is very, very much in the headlines and it's an incredible story, he bought the Dodgers in 2012.

23:11Right.