As Goes Tesla, So Goes the S&P
In 1953, General Motors CEO Charles Wilson said, “As goes GM, so goes the nation”. Seventy years later, a similar observation can be made for Tesla and the market-cap weighted S&P. Bull markets and bear markets are most simply defined by optimism or pessimism. Currently, optimism is winning.
To own the stock of Tesla, one must dismiss the current trend of falling revenue, falling margins, falling pricing power, falling EV market share and falling earnings, and all at the low, low price of 65x forward earnings. One must dismiss their China exposure and the fact that the company is adding capacity as inventories climb. One must believe that the company is not actually a car company at all but an “AI” company that will dominate not just industrial markets but software and robotics as well. But maybe, fundamentals have nothing to do with it.
To overweight stocks at these levels (a reasonable consideration), one must believe in a scenario where inflation continues to fall, but growth stops short of contraction. Consumption will stay strong, but wages will fall. Corporate earnings will accelerate, but not so much that inflation or wages rise again. The Fed will cut rates and growth will slip into a Goldilocks zone of not too hot and not too cold. Maybe, but that’s threading an awfully small needle and we haven’t even discussed geopolitics yet.
There is another dimension to what is fueling the inextricable link between Tesla and the S&P. Index funds and “passive” flows have come to dominate markets. Mutual funds have rapidly given way to the ETF. The oversimplified result of that is flows continue to reward market cap. In the words of Simplify Asst Management’s Mike Green, “Demand has become inelastic”. The result may be that the key factor driving Tesla or any stock is market cap vs. fundamentals. Our view is that the reason why the market weighted S&P has outperformed the equal weighted S&P by 15%, 3x the previous record of outperformance, is this distortion stemming from passive flows. When and why this dynamic of automated flows driving mega-caps will come to an end is hard if not impossible to know. My simple observation is that the risk of changing market structures tend to become understood after the accident.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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