The big US stocks dominating markets and investors’ portfolios just finished another earnings season. They reported spectacular collective results including record sales, profits, and operating cash flows. Yet their valuations still forged deeper into dangerous bubble territory. That sure increases the chances stock markets’ recent selloff snowballs into a long-overdue reckoning, a major bear market to normalize valuations.
The flagship S&P 500 stock index just enjoyed a massive bull run, blasting 49.2% higher between late October 2023 to mid-February 2025! The SPX achieved a phenomenal 60 record closes during that 15.8-month span. It was remarkably-one-sided as well, suffering no 10%+ correction-grade selloffs. Smaller pullbacks climaxed at -5.5% in mid-April 2024, -8.5% in early August, and -4.2% into early September.
Yet in recent weeks a new selloff is underway, slamming this leading benchmark down 6.0% in just nine trading days as of midweek! While still shy of being this upleg’s biggest selloff, it has already proven the sharpest. It could soon cascade into correction territory given the stiff headwinds stocks now face. The primary ones are fears this AI-spending frenzy will soon moderate and Trump’s tariffs spawning trade wars.
Both could considerably erode corporate revenues on multiple fronts, which earnings would amplify to bigger declines. Slowing, stalling, or falling profits are a huge problem for extremely-expensive bubble-valued stock markets. Lower earnings force nosebleed valuations even higher, elevating downside risks which are proportional to how expensive dominant stocks are. All investors should gird themselves for a bear.
For 30 quarters in a row now, I’ve painstakingly analyzed the latest results just reported by the 25 biggest SPX components and US companies. Almost all American investors are heavily deployed in these behemoths due to fund managers crowding in! How big US stocks are collectively faring fundamentally offers clues on what markets are likely to do in coming months. This table includes key SPX-top-25-component results.
Each of these elite companies’ symbols are preceded by their SPX rankings changes over this past year, and followed by their index weightings exiting Q4’24. Next comes their quarter-end market capitalizations and year-over-year changes, revealing how these stocks performed. Looking at market caps instead of stock prices helps neutralize the distorting effects of massive stock buybacks artificially boosting prices.
Next comes a bunch of hard accounting data directly from 10-K reports filed with the SEC. That includes each SPX-top-25 component’s quarterly sales, earnings, stock buybacks, dividends, and operating cash flows generated. Their quarter-end trailing-twelve-month price-to-earnings ratios are also shown. YoY percentage changes are included unless they’d be misleading, such as comparing positives with negatives.
Overall the big US stocks’ Q4’24 results proved fantastic, confirming why these companies are the best of the best. But despite their amazing ongoing size-defying growth, troubling signs abound. These include extreme concentration, the overwhelming probability these outsized growth rates aren’t sustainable, and extreme overvaluations. The AI bubble inevitably bursting and mounting risks of global trade wars pile on.
Diversification is essential for successful investing multiplying wealth over decades. That wise principle goes way back to ancient times. In the Biblical book of Ecclesiastes at 11:2, ancient Israeli king Solomon advised “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” The opposite of diversification is concentration, which investors today have increasingly bet the farm on.
Exiting Q4, the 25-largest S&P 500 stocks commanded fully 51.7% of its entire market capitalization! When I launched this quarterly research thread in Q3’17, that only ran 34.8%. This concentration record is driven by the beloved Magnificent-7 mega-cap technology stocks, which now alone account for 33.7% of the SPX’s entire market cap. Their staggering $17,846b is worth as much as the bottom 435 SPX stocks!
Talk about putting all your eggs in one basket, mega-cap tech is it. While that extreme concentration has been very successful in this huge bull run, it is super-risky. Stock markets are forever-cyclical, with bears inevitably following bulls. The SPX’s last bear was mild, merely seeing a 25.4% loss from early January 2022 to mid-October that year. Given their amazing fundamentals, the Mag7 ought to hold up better right?
Yet surrounding that last-SPX-bear span, the Mag7 averaged brutal 54.6% losses more than doubling the SPX’s! And extreme bubbles like this AI one are followed by far-more-serious bears. From March 2000 to October 2002, the SPX plunged 49.1% over 30.5 months. Between October 2007 to March 2009, the SPX plummeted 56.8% in 17.0 months! Extreme overvaluation coupled with extreme concentration ends badly.
In 2024 the S&P 500 soared 23.3% higher, a remarkable year though bested by gold’s 27.2% gains. The top 25 stocks way outperformed as fund managers increasingly piled in to chase them, soaring 40.9% in these last four quarters. Not surprisingly NVIDIA led the way, its market cap skyrocketing an epic 175.3% last year! A newer AI market-darling Broadcom came in second, with colossal 110.1% market-cap gains.
Ignoring the bubble-valuation elephant in the room for now, the rest of the SPX top 25’s fundamentals looked spectacular last quarter. Their combined revenues grew 6.8% YoY in Q4 to $1,360b, which is amazing given the vast scales they operate at. NVIDIA and Broadcom led the way with quarterly sales soaring 77.9% and 51.2% YoY! Those were directly fueled by hyperscalers’ eye-popping AI spending.
The hyperscalers are a subset of the Mag7 running massive data centers offering computing services to other businesses and developing AI infrastructure at astounding scales. Amazon, Microsoft, Alphabet, and Meta dominate on AI spending, collectively projecting to spend about $340b in 2025 alone! That’s about 36% higher than 2024’s huge $250b. NVIDIA’s 10-K illuminated how dependent it is on hyperscalers.
In the risk section of that annual report, NVIDIA warned that one company it didn’t name accounted for 13% of 2024 sales! Another indirect customer buying NVIDIA graphics-processing-unit AI-chip boards drove 19% of total revenue. So if the hyperscalers decide to or have to slow their monumental builds of AI infrastructure, NVIDIA’s sales and profits will plummet. That’s a major downside risk for the entire SPX.
The warning shot off this AI bubble’s bow came in late January, when NVDA stock crashed 17.0% in a single day! That made for a record single-stock market-cap loss of $595b. That happened on a Monday, triggered by news out of China. A small Chinese AI startup released a large-language model similar to ChatGPT called DeepSeek. It was reportedly developed with trivial resources compared to leading US LLMs.
Those have cost hundreds of millions to even billions of dollars to train, in vast data centers stuffed with the latest-and-greatest NVIDIA GPUs. But DeepSeek claimed it trained its LLM for under $6m in just a couple months, on way-fewer reduced-capability GPUs the US allows NVIDIA to export to China! AI benchmarks showed DeepSeek outperforming the large US LLMs, which threatened to upend the entire AI paradigm.
The hyperscalers’ investors are increasingly challenging their staggering AI spending, since the resulting products are only generating small revenues and virtually no profits! Demand just isn’t there, leading to collapsing prices for AI subscription services. Most people using LLMs can get enough utility out of the free versions. For example most Google search results now begin with often-good LLM summaries.
If American mega-cap techs’ colossal AI spends prove too-excessive for the resulting LLM usefulness and sales, they will have to dramatically scale that back. DeepSeek seriously challenged the bigger-is-better AI status-quo. Later revelations suggested DeepSeek had been distilled from ChatGPT, relying on the billions invested in it to train fast. Still nervous institutional investors are pressuring hyperscalers to slow down.
In addition to mounting risks of crumbling sales, NVIDIA faces other challenges. For most of its history, its GPUs were developed and sold for PC gaming. The beefier AI GPUs are expanded consumer ones. While data-center revenue skyrocketed 93.5% YoY to $35.6b in Q4, gaming sales fell 11.2% to $2.5b. That was partially driven by gamers waiting for NVIDIA’s next generation of GPUs releasing in Q1’25.
They are based on pared versions of the Blackwell chips used in the AI GPUs. But these new gaming GPUs haven’t been received well. Their raw performance increases over the previous generation are modest, unless fake AI-generated frames are inserted between real rendered ones. And despite very-high prices, their availability is virtually zero implying a paper launch. NVIDIA isn’t producing enough of these chips.
Like Apple, NVIDIA doesn’t manufacture its own products but contracts that out to Taiwan Semiconductor Manufacturing. Since AI GPUs are radically more profitable than consumer ones, NVIDIA is probably just allocating the vast majority of TSMC’s Blackwell output to those. But there are rumors of problems with these next-generation chips, including low yields and excessive power consumption making them run too hot.
Zooming back out, the biggest US stocks continue to show bifurcated performance between the Mag7 and everything else. Their revenues surged 12.6% YoY to $592b, but the next-18-largest US stocks’ only climbed 2.8% to $768b. The same is true on the bottom-line earnings front. Overall the SPX top 25’s surged an incredible 13.6% YoY to an all-time-record $248b. But all that growth came from mega-cap tech.
The Mag7’s profits exploded 25.3% YoY to $152b, with NVIDIA’s alone skyrocketing 79.8% to $22.1b. Yet the next-18-largest US stocks’ earnings actually slumped 1.1% to $96b! And those are skewed high by legendary investor Warren Buffett’s Berkshire Hathaway. Accounting rules force that giant investment conglomerate to flush unrealized stock gains and losses through net income every quarter, angering Buffett.
Berkshire’s huge Q4 profits of $19.7b are the only other ones rivaling the mega-cap techs’! Yet if their investment gains are backed out, they are a third lower at $13.1b. While we’re on Berkshire here, its colossal market cap of $975b exiting Q4 was only behind the Mag7 and Broadcom. Yet Buffett sees so few opportunities in these lofty AI-bubble stock markets that Berkshire’s cash hoard soared 99.4% YoY to $334b!
That’s an all-time record for a single company, and represents over a third of BRK’s market cap. Anyone can let capital sit in cash, parked in short-term Treasuries. Berkshire’s investors are getting more vocal in expressing their displeasure at that vast capital hoard not being allocated. And the wider implications for US stock markets are troubling. Even Warren Buffett struggling to find good deals implies a major market topping.
Back to earnings, Walmart’s Q4 results were also noteworthy. After the Mag7, Broadcom, and Berkshire, Walmart was the largest US stock exiting last quarter. Revenues and earnings growth exceeded Wall Street estimates. Yet its stock plunged 6.5% the day those results were reported, due to Walmart’s Q1 and full-year-2025 guidances coming in well below estimates. And that didn’t include the impact of any tariffs!
Walmart is the world’s largest grocer, which the majority of Americans depend on to afford food in these inflationary times. Because of its colossal size and buying power, it offers the lowest-cost groceries. If even mighty Walmart is seeing sluggish sales, Americans are really struggling with pinched budgets. It also imports vast amounts of food from Mexico, so 25% tariffs there would significantly ramp selling prices.
The biggest US companies have long plowed hundreds of billions of dollars into stock buybacks. That not only bids up their stock prices increasing executive compensation, but boosts earnings per share lowering its denominator. Last quarter the SPX top 25’s stock buybacks surged 15.2% to $86b. While enormous, that remained well under Q4’21’s $107b record. Interestingly the Mag7 bifurcation here went the other way.
The mega-cap techs’ stock buybacks merely climbed 6.2% YoY to a still-gigantic $52b in Q4, while the next-18-largest US stocks’ soared 32.4% to $34b. The Mag7’s stock buybacks likely slowed because of their epic AI spending, which they are paying for with their huge cash hoards. Their treasuries only edged up 1.6% YoY to $480b, way under past growth. But other factors may have contributed, like slowdown fears.
With Americans’ costs of living very high and still rising, there’s little disposable income left over after big necessities’ spending. We all have to pay for housing, food, insurance, and medical expenses regardless of their prices. With needs dominating incomes, wants have to take a back seat. That’s a growing risk for the entire Mag7’s gravity-defying revenues and earnings growth. A spending slowdown is a serious threat.
Apple launched its AI-enabled iPhone 16 at the end of Q3, heavily-hyped by Wall Street analysts. While Apple did sell $69.1b of iPhones last quarter, that actually slipped 0.9% YoY and came in well below estimates of $71.0b. If the first AI iPhone doesn’t go gangbusters while an AI stock bubble enthralls investors, that can’t be a good sign. Apple’s Q4 China sales also fell 11.1% to $18.5b, far behind $21.6b forecasts!
While nationalism likely played some role, Chinese reporting suggests iPhones are seen as too expensive compared to the competition in China. The gaps between how they perform versus iPhones are apparently narrow. Also the incremental improvements in successive iPhone generations are ever-more minor and often imperceptible. So consumers around the world are keeping their iPhones for longer before upgrading.
Apple’s colossal $36.3b in earnings last quarter were the biggest in the SPX by far. If they come under pressure from slowing iPhone sales, it could really impair the entire S&P 500 outlook. Most Wall Street analysts forecasting SPX targets simply add up all 500 companies’ profits then multiply them by whatever they think a reasonable forward price-to-earnings ratio is. Lower Apple profits will cut Wall Street SPX targets.
Both Amazon and Tesla are also at risk from slowing consumer spending as more Americans struggle. Odds are most of the stuff bought on Amazon is discretionary, not necessary living expenses. Amazon also sees a slowdown looming, projecting Q1 sales near a $153.3b midpoint well short of the $158.6b analysts had expected! Americans are slowing their Amazon buying with necessities prices so darned high.
Tesla’s cars have long been expensive and out of reach for most, even before this inflation. And Trump has long talked about revoking the electric-vehicle tax credit, which would raise Tesla prices. Tesla’s Q4 car revenues actually fell 8.3% YoY, likely worsened by liberals’ outrage over Elon Musk’s efforts to help reelect Trump then run DOGE to slash government spending. Tesla is going to have real challenges in 2025.
Small and medium businesses will also face pressure from lower consumer spending, which is a risk for the hyperscaler data-center service providers led by Microsoft, Alphabet, and Amazon. If their customers’ businesses wane, some will likely be forced to reduce their IT spending and advertising. The latter could really impact Alphabet and Meta, which heavily rely on profitable businesses buying lots of ads on their platforms.
The point here is there’s much uncertainty surrounding these record SPX-top-25 profits. Cash-strapped Americans are under increasing pressure to reduce spending wherever they can. And the great majority of Mag7 sales and profits are driven by discretionary spending, whatever is left over after paying for life’s essentials. These high prices have really pinched disposable incomes, a bearish omen for corporate profits.
Weakening earnings wouldn’t be a serious problem if valuations were low. But the SPX top 25’s average trailing-twelve-month P/E ratios exiting Q4 were already 45.9x! There wasn’t much difference between the Mag7 and next-18-largest US stocks either, at 49.6x and 44.5x respectively. For reference, US stock markets have averaged about 14x earnings over the past century-and-a-half or so, which defines fair-value.
Historically double that at 28x earnings is where bubbles start. So 46x exiting Q4 is deep into dangerous bubble territory! Considered another way, investors buying large US stocks today would have to wait about 46 years for them to earn back the current stock prices being paid. That exceeds most people’s useful investing lifespan. No wonder Warren Buffett is sitting on the sidelines in Treasuries biding his time.
Corporate profits are leveraged to revenues. When sales rise or fall, earnings move in multiples of those percentages. So if the myriad of risks out there slow, stall, or even shrink revenues, earnings are going to fall much more. If the stock markets were trading at something reasonable like 20x, that might not be a big deal. But priced-for-perfection more than double that, falling profits would really exacerbate this bubble.
Almost all big US stocks dominating investors’ portfolios are exceedingly-overvalued today. The only exceptions are the two money-center banks JPMorgan Chase and Bank of America, the oil supermajor Exxon Mobil, and Berkshire Hathaway. The latter’s super-low 9.1x P/E is very misleading though, mostly resulting from massive unrealized investment gains as the SPX powered relentlessly higher in this past year.
While it’s uncommon for SPX-top-25 earnings to decline, it still happens plenty. In the past 25 quarters, these big US stocks’ total profits have fallen 7 times. The last episode was in Q4’22, and since then there has been a long 8-quarter streak of rising earnings. So these markets are overdue for another decline, and those often clump together. Investors should be wary, and diversify their mega-cap-tech-dominated holdings.
Ironically despite soaring 27.2% in 2024 beating the SPX’s 23.3%, gold remains the most-underallocated asset. American stock investors still have virtually-zero gold allocations. A great proxy for this divides the value of the physical gold bullion held in trust by the world-dominant American GLD and IAU gold ETFs by the total market capitalization of all 500 SPX stocks. This ratio is currently running a trivial 0.2%, really nothing!
Like through all of history, every investor should have a 5%-to-10% portfolio allocation in gold. As it tends to shine when stock markets weaken, it is the ultimate portfolio diversifier. Gold’s upside potential can be leveraged with another 5% to 15% in fundamentally-superior smaller mid-tier and junior gold miners. Gold stocks remain deeply-undervalued relative to gold, since the AI bubble sucked in all the interest and capital.
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The bottom line is the big US stocks just reported spectacular Q4 results, including record sales and profits. Yet even those remained far too low to justify the rocketing stock prices during this AI bubble. Valuations remain deep into dangerous bubble territory, heralding a serious bear market to normalize stock prices with underlying corporate earnings. Mean reversions way lower are inevitable after bubbles.
And a broad array of factors is exacerbating this coming downside risk. The mega-cap techs are under increasing pressure to really curtail their astounding AI spending. Americans struggling with still-sky-high necessities prices have little disposable income left to buy wants, which is the great majority of mega-cap techs’ revenues. Weakening sales amplified by profits is a disaster for extremely-overvalued stock markets.
Adam Hamilton, CPA
March 7, 2025
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