1/2/2023: 2023 Prediction: Stocks are Still Overvalued
Happy New Year! Are you ready for 2023? Market is closed today but we already have some news coming in. Tesla announced their Q4 deliveries number today and it’s not pretty. Tesla missed analysts’ estimates of 420,000 vehicle deliveries for Q4 and it appears that they don’t sell out all the vehicles they produce any more as shown in the tweet above. In other words, they start to have consumer demand problems as previously mentioned. It’s unclear what’s going to happen to the TSLA 0.00 stock tomorrow but any richly-valued stock missing expectations is going to be severely punished in the current environment.
Stocks are still expensive. SPY 0.00’s CAPE ratio is currently ~28 (while the historical median is ~16). With the interest rate at 4.25%, investors most likely have less appetite for equity as they can earn a risk free return of ~4.25%. Many public companies used to borrow to buy back their stocks to boost their EPS. That playbook is no longer working with the high borrowing costs. In addition, borrowing just becomes more expensive so it’s harder to grow profitably with debt. In Tesla’s case, higher interest rates directly impact consumer demand as most people buy their car with credit. Higher interest rates make their car payments more expensive. I don’t believe the high interest rate environment has been fully priced into large index funds like SPY 0.00. But once the companies start to miss their earnings, we may start to see a sentiment change even on index funds. Let’s not forget that SPY 0.00 fell for 3 straight years from 2000 to 2002. I don’t know if we are going to see something similar but to me, the insane level of irrational exuberance at the end of 2021 feels very similar to the beginning of the year 2000.
2022 was a pretty rough year for big tech. Stocks for Facebook, Amazon and Tesla all fell more than 50% from their ATH. Google fell ~40% from ATH. Apple and Microsoft are relatively strong and only fell ~25% each. But Apple’s PE is now 21 while Microsoft’s PE is 26. I think both are a bit overvalued given Apple is mostly a hardware business and both have <10% top line growth rates. I believe Apple and Microsoft stocks are quite vulnerable to disappointing quarterly earnings and I won’t be shocked to see AAPL 0.00 goes below $100 and MSFT 0.00 goes below $200 in 2023. They are both great companies but not necessarily great investments at current prices. This is pure speculation but if people start to pull out of SPY 0.00 index funds, Apple and Microsoft stocks will be greatly affected as they each represent more than 5% of the index weights for S&P 500.
2023 is probably going to be another volatile year for stock markets. I might consider buying the dip if there’s a 20% correction from the current levels. If there’s no such correction, I am happy earning 4.25% on my cash reserve and watch it from the sidelines.
Must be cuz he saturated global shipping again... Lol