Where are we with Investing Today! 15% UP Per Year Next? or 80% Crash?
Summary
Sven analyzes the current state of the S&P 500, noting that while returns have been exceptional since 2009, current forward valuations and record-high operating margins are unsustainable. Sven expresses concern that Wall Street's projections for earnings to nearly double in three years are overly exuberant and ignore historical averages. Sven argues that if margins retract to normal levels or a recession occurs, both earnings and valuations will crater simultaneously.
Sven highlights a critical macro risk regarding the US debt cycle, referencing Ray Dalio's warnings about a debt crisis within the next few years. Sven states that US interest payments have surged to 1.2 trillion dollars and that debt-to-GDP levels above 80% historically lead to negative growth due to the crowding-out effect. Sven suggests that while passive flows and buybacks might push the market up 15% annually in the short term, a reckoning is inevitable that could return the market to 2013 levels.
Sven advocates for a value-based "win-win-win" strategy where the primary goal is to compound wealth without the risk of total loss. Sven mentions that personal performance has matched the S&P 500 over eight years but emphasizes readiness for a crash through either deep value stocks or tail-risk hedging. Sven warns that ignoring these risks is dangerous for long-term investors.
Mentioned Stocks
Reasoning: Sven warns that Nvidia's growth is driven by 'pure marketing' and 'circular financing' involving other AI firms, which makes current valuations unsustainable. Sven argues that if AI investments do not deliver a scaled return on investment, the stock could face an 80% crash. Sven states that Nvidia's reliance on supply constraints to drive demand is a risky signal for long-term investors.
Reasoning: Sven claims there is 'circular financing' in Microsoft's cloud business, reporting growth that may not truly be there because the company is effectively self-purchasing via stakes in AI firms like OpenAI. Sven states that if these AI distortions are removed, the earnings outlook changes significantly. Sven argues that this artificial growth creates a high risk of valuation contraction.
Reasoning: Sven warns that the broader S&P 500 is trading at a P/E ratio of 26-30, compared to a historical average of 15. Sven argues that a double whammy of valuation normalization and earnings contraction could lead to an 80% market crash. Sven states that investors should be prepared for the market to potentially return to 2013 levels if the current debt and AI bubbles burst.
Reasoning: Sven states that Sven no longer owns ADM because the stock price doubled recently. Sven argues that the protection and margin of safety it once offered as a defensive play have been halved due to this price increase. Sven states that at current levels, it no longer meets the criteria for a value investment with a favorable risk-reward profile.
Reasoning: Sven identifies Prosus (including Tencent) as a business on the 'cheap side' of the market. Sven states that it fits a long-term value strategy focused on owner earnings and cash flows. Sven argues that buying such businesses at a low price provides the necessary margin of safety to survive market cycles.