Will SpaceX Be The Pin That Pops The Stock Market Bubble?
Since its low in March of 2009, the S&P 500 Index has gone up by a factor of nearly 11 in just over 17 years, from 676 to 7394, which doesn’t include dividends. As I and others have noted, we have a generation of “investors” who’ve never seen a meaningful market peak or a prolonged period of disappointing returns.
And now, today, we have perhaps the biggest capital markets event ever, with the IPO (initial public offering) of SpaceX set to raise a record of $75 billion, to be soon followed by similarly large offerings from AI companies Open AI and Anthropic.
The enthusiasm for SpaceX dwarfs pretty much anything we’ve seen in markets, and that spans 44 years. There’s a saying on Wall Street—“When the ducks are quacking, FEED THEM.”
You’ve heard of supply and demand? Well, Wall Street is providing the supply. This, along with recent market action is the kind of market behavior that is normally observed at speculative market peaks. AKA A BUBBLE.
We’ll examine this in a few ways inside, looking at inflation, earnings and the performance of prior large IPOs.
Price-Insensitive Investors
In Friday’s trading of SpaceX shares, we’re likely going to witness hundreds of thousands of “investors” who don’t care about expected returns and even remain indifferent to losing a decent amount of money on a percentage basis. The stock has been priced at $135 per share, opened at $150 and is trading around $170 at present. For perspective, at its offering price, SpaceX will be trading at 92 times revenue(price divided by sales), and in its most recent fiscal year, hasn’t made a profit. In comparison, at the top of the dot-com bubble in 1999-2000, tech companies in the S&P 500 sold for an average of 7 times revenue, according to Spencer Jakab of the Wall Street Journal.
This is the kind of thing that happens in bubbles. People lose all reasons to be rational. But, that’s human nature. It’s happened before, and it will happen again. This isn’t about calling a market peak here—that’s pretty impossible, but the kinds of things that are happening certainly have taken place at prior important peaks. It’s more perspective, and being mindful that as crazy as the market has been in recent weeks and months, this bubble behavior could continue for many more months, or it could be the beginning of a major market collapse. Morningstar, the independent financial services firm that provides market research on mutual funds, stocks and ETFs recently published a report that shows their estimate of “fair value” of SpaceX at $63 per share. That’s not likely to be heeded by many “investors,” most of whom wouldn’t know a Morningstar report even if you put it under their nose. “Just get me some, I’m going to be rich!”
It’s fair to say that every speculative market peak has a story attached to it, and this one’s no different, with the story being AI, or Artificial Intelligence. And arguably, SpaceX is not an AI company, but rather the world’s dominant space company, headed by the iconoclastic personality of Elon Musk. SpaceX has done amazing things, having leveraged lower costs by building reusable rockets to build Starlink, the space-based broadband product that many airlines are adopting. They’re doing amazing things, and may continue to do so, but the question always is, does the hype equal the substance? With Musk, there’s always hype, always promises about the future, and if you get the timing right, yes, there can be substantial gains. Tesla stock is a great example of both wealth creation, and then, not delivering the story.
There are huge differences, though, between Tesla and SpaceX. Tesla went public in June of 2010, and the company was valued at $1.7 billion. According to a recent Barron’s story, the stock has earned investors a 370-multiple return from its split-adjusted IPO price of $1.13. But as the company has grown larger, it has struggled to generate returns. Look at the chart below, courtesy of www.stockcharts.com.
Since November 1 of 2021, a period now of over 4 1/2 years, Tesla stock has been dead money, having actually lost -0.20% annualized during that time span, compared to simply owning the S&P 500, which has compounded at 12.2% per annum in the same time period. Here’s the contrast with SpaceX, though. According to an AI search I did using Gemini, seven years ago (forget about 2002, which is when SpaceX was founded), SpaceX was valued at $33.3 billion. Based on the offering price, the stock is now valued at $1.75 trillion, which is a return of 52 times your money in 7 years, or 77% per annum compounded. In other words, fantastic returns have already been made. If investors buying at $135 or more think there’s a road to riches from here, I’ve got a rocket to Mars waiting for you.
If that’s not enough fodder for you, consider the historical record of IPOs. According to the data from the Jay Ritter Study “IPOs: Updated Long-run Statistics”: 1980-2024 below. The chart is courtesy of Charlie Bilello of Creative Planning.
This is backed up by a separate study from Jim Stack at InvesTech Research (www.investech.com) which is shown below.
Of the 10 largest IPOs of the last 26 years prior to SpaceX, 6 of the 8 companies were below their offering price after one year, with an average loss of -31.8%, and only VISA and Kraft Foods bucking the trend. The two companies at the bottom of the list are much more recent, and though this data was not included in the table, thus far, Medline is nearly 6 months past its first day, and the stock is down to $37 from $41, while Cerebras Systems is only one month in, and the stock has cratered from $311 to $226.
The bottom line is this. The historical odds favor SpaceX stock being lower than $135 a year from now, let alone lower from whatever pop the stock may experience on Friday. By November, we’ll know if the overall market has blown off with it.
Inflation Is Becoming A Problem
In the latest inflation report this week, inflation as measured by the CPI (Consumer Price Index) rose to a three-year high, now at 4.2% annualized year-over-year, as shown in the chart below from Ned Davis Research (www.ndr.com).
The chart below takes the monthly data and turns it into a model, which gave a SELL signal for stocks based on the April 30 data. The last sell took place late in October 2021 and successfully foreshadowed the 2022 bear market, then reversed and gave a very timely BUY right near the bottom in the fourth quarter of 2022. According to NDR, since 1965, the S&P 500 has fallen an average of 1.6% in the six-month window starting two months after bearish signals, so the odds will shift to the downside for stocks starting July 1.
Once inflation reaches the 4% zone, it has typically become a headwind for stock prices. This is reinforced not only from NDR’s work but also from Martin Pring, below.
Despite day-to-day news that can sometimes imply the war with Iran might be ending, the reality is the war is not ending, and the longer the Strait of Hormuz is blocked, the higher the probability of an even further substantial rise in energy prices, which would take the above inflation figures even higher. The third quarter really bears watching, as seasonal trends are unfavorable especially in August and September.
Aren’t Great Earnings Supporting Stocks?
According to Mark Hulbert of Market Watch, FactSet estimates, based on earnings reports from 94% of S&P 500 companies reporting, that the year-over-year growth rate for S&P earnings will be 28.4% for the first quarter of this year. That’s the highest since the fourth quarter of 2021. Isn’t that good? Strong earnings growth?
Actually, it’s intuitively wrong. That’s because when earnings are too strong, almost all of the good news is already priced into stocks. That’s the conclusion of data from Ned Davis Research, which shows when earnings growth is greater than 20%, average returns were barely positive and well below average.
If there’s one thing to watch for as a clue to perhaps when the market has peaked, it is the reaction of stocks to great earnings reports. If there’s a great report and the stock tanks, that’s the sign that all the good news is in the past. A recent example of this is Broadcom, which last week reported a record 54% growth in earnings and 48% jump in revenue. Look below at what happened to the stock after the announcement. The chart is courtesy of www.stockcharts.com.
If this begins to happen to many leading stocks, that will be the sign the market has peaked. Stocks are forward-looking, and it’s why they start going up before recessions have ended, when earnings are awful, because they are anticipating the recovery. The same is true near the end of economic expansions, as the market begins to recognize that growth rates are unsustainable. We may be at that point.
Will Momentum Save The Day?
Before last week’s plunge, the S&P 500 had closed up 9 weeks in a row, a show of very strong upside momentum, and a pretty rare occurrence at that. In fact, according to Ned Davis Research, this has taken place only 14 prior times since 1928, and in 12 of the prior 14 cases, stocks were higher one year later by a mean of 12.1%, which is 50% higher than the mean for all periods of 8.1%.
This isn’t statistically significant, but it is something the bulls can hang their hat on.
TABR Portfolio Allocations
At present, our tactical equity exposure sits at 60%, with three of our five stock market risk models in a positive mode, though I should mention that one of our models which is the only one with a short-term orientation, is very near a SELL level, which would take our exposure down to 40%. Our high yield bond fund risk model remains on its BUY signal from April 17, while our gold model is very close to generating a SELL.
All in all, the evidence is neutral, with sentiment way too speculative and optimistic, with the tape still mostly positive.
Material Of A Less Serious Nature
A nun, badly needing to use the restroom, walked into a local Hooters. The place was hopping with music and loud conversation and every once in a while, the lights would turn off. Each time the lights would go out, the place would erupt in cheers.
However, when the revelers saw the nun, the room went dead silent. She walked up to the bartender and asked, “May I please use the restroom.”
The bartender replied, “OK, but I should warn you that there is a statue of a naked man in there wearing only a fig leaf.”
“Well, in that case, I’ll just look the other way,” said the nun. So, the bartender showed the nun to the back of the restaurant.
After a few minutes, she came back out, and the whole place stopped just long enough to give the nun a round of applause. She went to the bartender and said, “Sir, I don’t understand. Why did they applaud for me just because I went to the restroom?”
“Well, now they know you’re one of us,” said the bartender. “Would you like a drink?”
“But, I still don’t understand,” said the puzzled nun.
“You see,” laughed the bartender, “every time someone lifts the fig leaf on that statue, the lights go out. Now, how about that drink?”
School is pretty much out now for everyone, including our daughter, who finished her last final on Thursday at Cal Poly San Luis Obispo. Since our next update will likely be after July 4, here’s wishing you a Happy Fourth of July in celebrating our nation’s independence. Baseball, hot dogs, ice cream. Sounds good to me. Winning baseball, well that’s another story when you’re an Angels or Giants fan like me. :) I’m ready for 49ers football!
As always, thank you for your continued trust and confidence in all of us at TABR.
Sincerely,
Bob Kargenian, CMT
President
TABR Capital Management
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