Clueless In The Canyons of Wall Street, Part 1

The stock market has long been drastically over-valued owing to the Fed’s chronic money-pumping and price-keeping operations. But since the interim low of October 11, 2022 at 3,588 on the S&P 500 the boys and girls down in the canyons of Wall Street have lost their minds completely.

The index now stands at nearly 5,200 or 45% higher. Yet during the interim 18 months what amounts to a planet-wide outbreak of Murphy’s law has set in. Nearly everything that could go wrong has gone wrong.

Washington’s proxy war against Russia has essentially been lost, meaning that growing desperation in NATO may trigger a hot war with Russia. Likewise, Israel’s war on Gaza could explode into a regional conflagration at any minute. And relations with China have gotten so frosty that on his recent trip there Secretary Blinkey found himself greeted by a State Department limo driver at the airport, not even a third-tier Chicom official.

At home, inflation is resurgent, the economy slides toward recession, public and private debt continues to soar, the Congress has become ungovernable and a presidential election  contest between two proven failures and misfits hurtles toward November 5th with “none of the above” clearly in the lead. Indeed, with each passing day the odds of a hung jury in the Electoral College due to RFK’s flourishing third-party insurgency means that come January 2025 the War Capital of the world may find itself in a constitutional crisis of epic proportions.

So why in the world would rational investors choose this moment to substantially inflate already way over-extended PE multiples? That is, a year ago the valuation multiple on the S&P 500 already stood at a frisky 18.4X LTM earnings. So had that multiple remained in place the index level would now be at 4200 or 20% lower than today’s market.

In dollars and cents terms, the S&P 500 would be valued at $32 trillion today rather than the actual figure of $40 trillion. On the surface, of course, that huge gain makes precious little sense because LTM earnings on the S&P 500 have stagnated at about $225 per share,  even as the macroeconomic and geopolitical environments have dimmed materially per the worries itemized above.

Still, it is no great mystery as to where the extra $8 trillion of market cap came from. To wit, the high-rollers in the canyons of Wall Street have nearly brow-beat the Fed into another capitulation and utterly unjustified round of rate cutting. So, the smart money is simply front-running what they believe to be the Fed’s impending surrender.

For want of doubt, consider the recent market cap explosion of a typical tried-and-true trading sardine, which actually serves tacos and burrito bowls. We are referring to Chipotle (CMG), which has seen it market cap soar from a preposterous level of $50 billion last October, where it traded at 43X earnings, to $88 billion at present. That’s a $38 trillion value gain in six months and represents nearly 68X its LTM earnings.