The most important data release of the entire fourth quarter occurred on Friday, Nov. 14, and there's a good chance you might have missed it.

No later than 45 calendar days following the end of a quarter, institutional investors with at least $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission. This filing provides a snapshot for investors that spills the beans on which stocks, exchange-traded funds (ETFs), and select option contracts Wall Street's savviest money managers bought and sold in the latest quarter (in this instance, the September-ended quarter).

Although there's a laundry list of successful billionaire investors to monitor, none garners attention quite like Berkshire Hathaway's (BRK.A0.41%)(BRK.B0.57%) billionaire boss, Warren Buffett. The "Oracle of Omaha" has nearly doubled the annualized return of the S&P 500 since 1965, including dividends paid!

Berkshire Hathaway's latest 13F wasn't short on surprises. Berkshire's No. 1 holding, Apple (AAPL+0.42%), was meaningfully pared down, while another member of the "Magnificent Seven" was introduced as a borderline core holding.

Nearly three-quarters of Berkshire's stake in Apple has been axed in two years

Let me preface the following discussion with two critical points. First, Warren Buffett is an unwavering optimist who would never bet against America or the U.S. stock market. He's a long-term investor at heart.

However, the second must-know point is that he's an ardent value investor. If the Oracle of Omaha doesn't believe he's getting a good deal, no number of competitive advantages can keep Buffett from potentially being a seller of a public company.

With the above being said, Berkshire's billionaire boss has been a persistent seller of Apple stock since Sept. 30, 2023, with this position being cut in six of the last eight quarters. Including the 41,787,236 shares disposed of during the third quarter, a total of 677,347,618 shares were sold over the two-year period, representing a 74% reduction.

It's certainly plausible that profit-taking is the primary reason for this selling activity. During Berkshire Hathaway's annual shareholder meeting in 2024, Buffett opined that a higher (expected) peak marginal corporate income tax rate was coming, and that locking in some of Berkshire's unrealized investment gains at an advantageous rate would be wise. No investment holding has bulked up Berkshire's unrealized profits quite like Apple.

The concern for investors is that there may be more to this story than meets the eye.

For example, despite having a generally loyal customer base and a valuable brand, Apple's growth engine has been relatively stagnant for years. Although subscription services revenue continues to be the one bright spot, sales of physical devices, including the popular iPhone, have been somewhat flat for nearly four years. In other words, Apple is no longer the growth story it once was.

To add fuel to the fire, Apple's valuation has been expanding to eyebrow-raising levels amid this lack of meaningful sales growth. While the company's market-leading share repurchase program has undoubtedly helped boost its earnings per share (EPS) over time, Apple is valued at a trailing-12-month (TTM) price-to-earnings (P/E) ratio of nearly 37, which is a 22% premium to its average TTM P/E ratio over the trailing-five-year period.

While Warren Buffett has been known to bend some of his unwritten investing rules, he doesn't budge when it comes to value. Apple is no longer the screaming bargain it once was.

The Oracle of Omaha has taken a greater-than $4 billion stake in a truly magnificent company

At the other end of the spectrum, Berkshire Hathaway's soon-to-be-retiring billionaire CEO oversaw purchases in seven securities during the third quarter. None of these buys made more waves on Wall Street than the 17,846,142 shares purchased of Magnificent Seven member Alphabet (GOOGL+3.02%)(GOOG+2.82%). Buffett's company specifically purchased the Class A (GOOGL) voting shares, with the value of this position handily surpassing $4.3 billion by the end of September.

Most of Berkshire Hathaway's purchasing activity over the last three years has involved establishing positions ranging from $10 million to as much as $1.7 billion. In just three months, Buffett's company built a stake exceeding $4 billion in Google parent Alphabet, making this stock, which has gained more than 11,000% since its initial public offering (IPO), a borderline core holding (1.6% of Berkshire's invested assets).

The first important box Alphabet checks off for Berkshire's billionaire chief is its sustainable moat. Google has accounted for between 89% and 93% of global internet search share since 2015, according to data compiled by GlobalStats. Not even the emergence of large language models (LLMs) has threatened Google's near-monopoly status for internet search, which is fantastic news for the company's ad-pricing power.

To build on the previous point, Warren Buffett tends to be a big fan of cyclical businesses. He's aware of the nonlinear nature of economic cycles — periods of economic growth last substantially longer than recessions — and positions Berkshire's investment portfolio to take advantage of these long-winded growth opportunities. Ad-driven businesses, such as Google and Alphabet's streaming service YouTube, benefit from disproportionately long periods of economic expansion.

Alphabet is also a key player in the cloud infrastructure service space. Google Cloud accounted for an estimated 13% of global cloud infrastructure service share for the third quarter, according to Synergy Research Group. Sales for Google Cloud jumped 25% in the September-ended quarter from the prior-year period, with an annual revenue run rate that now surpasses $60 billion. The incorporation of generative artificial intelligence and LLMs into Google Cloud for clients can further accelerate this segment's growth rate.

Continuing down the list, Alphabet's balance sheet is something to marvel at. The company closed out the quarter with $98.5 billion in combined cash, cash equivalents, and marketable securities, and has generated $112.3 billion in cash from its operating activities through the first nine months of 2025. This abundance of capital enables Alphabet to make aggressive investments in high-growth initiatives, as well as repurchase its stock and distribute a dividend to its shareholders. Warren Buffett has always been a fan of hearty capital-return programs.

The cherry on top is that Alphabet's valuation makes sense. Although its TTM P/E ratio of 27 might not appear inexpensive on the surface, Alphabet's projected annual sales growth rate of 13% to 14% per year suggests it offers more long-term upside than Apple.

The post Billionaire Warren Buffett sold 74% of Berkshire's stake in Apple and has piled more than $4 billion into a "Magnificent" stock that's up over 11,000% since its IPO appeared first on The Motley Fool Australia.

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Sean Williams has positions in Alphabet. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Apple, and Berkshire Hathaway. The Motley Fool Australia has recommended Alphabet, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• It was business as usual for Nvidia in the fiscal second quarter, with Wall Street's artificial intelligence (AI) leader once again blowing past consensus expectations.
• However, Nvidia's revenue breakdown raises serious concerns about the sustainability of its growth.
• In addition, a "reward" for its shareholders contradicts the actions of the company's executives and directors.

Over the past three years, nothing has moved markets more than the rise of artificial intelligence (AI), and no stock has benefited more from the evolution of AI than Nvidia (NASDAQ: NVDA). The prospect of having software and systems empowered with AI making split-second decisions is a potential game-changer in most industries around the globe.

Nvidia has found its niche as the leading supplier of graphics processing units (GPUs) used in enterprise data centers. GPUs are the "brains" that fuel split-second decision-making, as well as the training of large language models.

No earnings report tends to garner more attention than Nvidia. While surpassing Wall Street's consensus revenue and profit forecasts has been something of the norm, Nvidia's latest report sounded a silent alarm that should serve as a warning to shareholders, as well as temper artificial intelligence hype.

It was business as usual for Nvidia in the fiscal second quarter

If there's one thing Nvidia has on its side, it's consistency. Its $46.7 billion in net sales (up 56% from the year-ago period), and its $1.05 in earnings per share (EPS), both handily leaped over the bars laid by Wall Street analysts. This was the 11th consecutive quarter that Nvidia's EPS surpassed expectations.

The star of the show continues to be its data center segment, which accounted for more than 88% of reported sales. Exceptionally strong sales of Blackwell, coupled with "extraordinary" demand for next-gen chip Blackwell Ultra, according to CEO Jensen Huang, has powered the charge.

Perhaps the most impressive operating metric in Nvidia's fiscal second quarter report (ended July 27) is its generally accepted accounting principles (GAAP) gross margin, which clocked in at 72.4%. Though this was down 270 basis points from the prior-year period, it represents the first sequential quarterly improvement in gross margin in more than a year.

Huang hasn't been shy about his desire to maintain Nvidia's compute advantages and aims to bring a new advanced AI chip to market each year. The ramp-up of Blackwell Ultra will be followed by the expected debuts of Vera Rubin and Vera Rubin Ultra in the latter-halves of 2026 and 2027, respectively. This uptick we're seeing in GAAP gross margin indicates Nvidia is maintaining strong pricing on its AI hardware, at least for now.

In addition, Nvidia's about-face with its gross margin may indicate ongoing AI-GPU scarcity. Enterprise demand outweighing supply has been one of Nvidia's core catalysts to this point.

Nvidia is sounding a silent warning -- but will investors listen?

However, this earnings report isn't the slam-dunk it's made out to be, with two silent warnings alerting to potential trouble on the horizon for Wall Street's most valuable company and most-hyped innovation.

The first issue has to do with Nvidia's concentration of revenue, which can be found in its quarterly filed 10-Q with the Securities and Exchange Commission. Per the company, "For the second quarter of fiscal year 2026, sales to one direct customer, Customer A, represented 23% of total revenue; and sales to a second direct customer, Customer B, represented 16% of total revenue, respectively, both of which were attributable to the Compute & Networking segment."

In other words, approximately $18.2 billion of Nvidia's $46.7 billion in total sales came from just two companies during the latest quarter. Within its data center segment ("Compute & Networking"), this dynamic duo accounted for more than 44% of sales. Over the last year, Nvidia has become increasingly reliant on a narrower group of companies for its net sales and profit growth.

On one hand, optimists can argue that it's a good thing Nvidia is intricately tied to these dominant businesses. Though Nvidia doesn't spill the beans on the names of its top clients, customers A and B are (in no particular order) probably Meta Platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT), with both "Magnificent Seven" members aggressively investing in AI-data center infrastructure.

On the other hand, both Meta and Microsoft are internally developing AI-GPUs to use in their data centers. Even though these chips present no external threat to Nvidia, they're considerably cheaper and more readily accessible (not backlogged), and they can easily cost Nvidia valuable data center real estate in future quarters.

Furthermore, Huang's emphasis on bringing a new advanced AI chip to market each year has the potential to rapidly depreciate prior-generation GPUs. This could quickly devalue the GPUs that companies such as Meta and Microsoft have already purchased, which in turn may delay upgrade cycles and/or weigh on Nvidia's gross margin in the future if buyers opt for cheaper hardware.

But wait -- there's more

The other silent and subtle warning investors will find in Nvidia's latest earnings release is its "reward" for long-term shareholders. With $14.7 billion remaining under its prior share repurchase authorization, Nvidia's board approved an additional $60 billion worth of buybacks.

Share buybacks and dividends are two of the most direct ways public companies create incentives for long-term investing. For businesses with steady or growing net income (and Nvidia certainly qualifies), share buybacks have the ability to increase EPS as the outstanding share count declines. In short, share repurchases can make a company's stock more fundamentally attractive to investors.

So why is a $60 billion share-repurchase allotment bad for Nvidia?

For starters, the last thing investors of a company that just delivered 56% year-over-year sales growth should want to see is it spending its capital on buybacks. Nvidia stock has gained more than 1,100% since 2023 began and is sporting a historically high price-to-sales (P/S) ratio. Aside from the fact that its shares aren't particularly cheap, a $60 billion share buyback authorization suggests management is struggling to find other high-growth initiatives to invest its capital into.

It's also incredibly odd to see Nvidia's board promote such a sizable repurchase program when no insider has purchased shares of the company since early December 2020. Over the trailing-five-year period, more than $4.7 billion of Nvidia stock has been sold by executives and board members.

Between Nvidia's dangerous revenue concentration and its head-scratching buyback allotment, things may not be as perfect for the company or the AI revolution as they appear.   

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Nvidia just sounded the silent alarm — but are investors paying attention? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• The growing case for this semiconductor ASX ETF
• ASX investors: Are you overinvested in the Magnificent 7 without knowing it?
• If I could buy only one ASX ETF for the next 10 years, this could be it
• Could this ASX ETF be the easiest way to invest in AI?
• 5 things to watch on the ASX 200 on Thursday

Sean Williams has positions in Meta Platforms. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Meta Platforms, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Optimists have had every reason to smile over the last two-plus years. Since the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite bottomed out in October 2022, the bulls have been in firm control on Wall Street. Recently, all three indexes worked their way to record-closing highs.

Though catalysts have been abundant and include Donald Trump's return to the White House, stock-split euphoria, and better-than-expected corporate earnings, the primary wind in Wall Street's sails has been the rise of artificial intelligence (AI).

The ceiling associated with AI is astronomically high. Giving software and systems the ability to reason, act, and evolve over time, all without the need for human intervention, is a potential long-term game-changer for most industries around the globe. It's why the analysts at PwC believe artificial intelligence will add $15.7 trillion to the global economy by 2030.

While there have been dozens of direct and ancillary beneficiaries of the AI revolution, no company is the face of this movement more than Nvidia (NASDAQ: NVDA).

Nvidia rightly claims its spot as the AI kingpin

When the curtain closed on 2022, Nvidia was a $360 billion tech stock known best for its graphics processing units (GPUs) used in PC gaming and cryptocurrency mining. Less than two years later, it had gained more than $3 trillion in market value and (briefly) became Wall Street's largest publicly traded company.

Nvidia's ascension has everything to do with its Hopper (H100) GPU and next-generation Blackwell GPU architecture, which are enabling the training of large language models (LLMs) and powering generative AI solutions. Orders for the company's hardware are backlogged, with CEO Jensen Huang referring to demand for Blackwell as "insane" back in October.

Having a superior product, in terms of computing speed, and having demand for that product overwhelm supply, is an envious position to be in. AI-GPU scarcity has allowed Nvidia to charge a 100% to 300% premium to competing AI chips, which in turn has pushed its gross margin into the stratosphere.

Nvidia is having success beyond its AI hardware, as well. The company's CUDA software platform, which is used by developers to build LLMs and maximise the computing potential of their GPUs, is helping to keep clients loyal to its ecosystem of products and services.

With enterprise AI spending still in its infancy and no other chipmakers particularly close to matching the computing potential of the Hopper or next-gen Blackwell GPU, Nvidia would appear to be ideally positioned for the future.

But if investors pay close attention to what Nvidia's insiders are up to, they might change their tune.

Nvidia's insiders are speaking volumes — but is anyone listening?

One of the best aspects of putting your money to work on Wall Street is that it's more transparent than it's ever been. With a click of a button, investors have instant access to operating results, balance sheets, management commentary, and investor presentations.

Additionally, investors can track the purchasing and selling activity of Wall Street insiders, which represent the high-ranking executives and board members of publicly traded companies. Insiders are required to file Form 4 with the Securities and Exchange Commission within two business days following a transaction date.

On December 3, 2024, Nvidia hit a dubious milestone. This marked exactly four years since the last insider purchased shares of the company on the open market. In this case, it was Chief Financial Officer Colette Kress's two children who were the beneficiaries of respective 100-share purchases, per the Form 4 filing. In the four years and two months that have followed, 161 Form 4s have been filed, all of which were insider sales totaling an aggregate of $3.4 billion.

To be fair, not all insider selling activity is necessarily nefarious. A lot of high-ranking executives receive the lion's share of their compensation in the form of vested shares and stock options. Insiders need to execute their options contracts before they expire and might choose to sell shares of their company to cover their federal and/or state tax liability.

Then again, 161 dispositions to 0 acquisitions over a span of 50 months is a pretty telling story. If the company's own management team and board of directors don't view their stock as a bargain, why should investors?

NVDA PS Ratio data by YCharts. PS = price to sales.

Companies on the leading edge of a next-big-thing innovation being in a bubble is nothing new. Dating back to the advent of the internet in the mid-1990s, every game-changing technological innovation has navigated its way through an early-stage bubble. With most businesses lacking a clear game plan with their AI investments, there's a good chance we're witnessing history rhyme, once more.

Nvidia's valuation is also consistent with previous bubbles. Prior to the bursting of the dot-com bubble a quarter of a century ago, Amazon and Cisco Systems peaked at roughly 40 times their trailing-12-month (TTM) sales. Perhaps uncoincidentally, Nvidia topped out around 42 times TTM sales last summer.

Even with Nvidia possessing well-defined competitive advantages in AI-accelerated data centres, the persistent selling by insiders and complete lack of buying points to Nvidia stock being richly valued.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Nvidia's insiders are speaking volumes with their stock trading activity — but are you listening? appeared first on The Motley Fool Australia.

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• Could this ASX ETF be the easiest way to invest in AI?
• 5 things to watch on the ASX 200 on Thursday

Sean Williams has positions in Amazon. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Cisco Systems, and Nvidia. The Motley Fool Australia has recommended Amazon and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Since 2023 began, Wall Street's major stock indexes have been practically unstoppable. The ageless Dow Jones Industrial Average (DJX: .DJI), benchmark S&P 500 (SP: .INX), and growth-powered Nasdaq Composite (NASDAQ: .IXIC) have ascended to numerous record-closing highs.

Investors haven't hurt for catalysts, with a laundry list of positives responsible for perpetuating this more than two-year rally. This includes the rise of artificial intelligence (AI), Donald Trump's election night victory (all three stock indexes soared during his first term in the White House), and better-than-expected corporate earnings, to name a few key variables.

But with the stock market sporting one of its priciest valuations in 154 years, corporate execution needs to be flawless to maintain this rally. Unfortunately, some of Wall Street's most influential companies have an earnings quality problem — and it simply can't be ignored any longer.

A painful realisation: The stock market is historically pricey

When investors are attempting to value a stock, they'll often turn to the traditional price-to-earnings (P/E) ratio. This measure divides a company's share price into its trailing-12-month (TTM) earnings per share (EPS). It's a fantastic tool for quickly determining the cheapness or priciness of mature businesses, relative to its industry and/or the broader market, but it can get tripped by growth stocks and shock events that reduce EPS.

A considerably better measure of value for the broader market is the S&P 500's Shiller P/E Ratio, which is also commonly known as the cyclically adjusted P/E Ratio (CAPE Ratio). Instead of using TTM EPS, the Shiller P/E Ratio is based on average inflation-adjusted EPS spanning the last 10 years. This smooths out the effects of shock events and allows for true apples-to-apples valuation comparisons.

Even though the Shiller P/E Ratio wasn't created until the latter half of the 1990s, it's been back-tested to January 1871, allowing for 154 years of historic valuation comparisons.

S&P 500 Shiller CAPE Ratio data by YCharts.

As of the closing bell on Feb. 6, the S&P 500's Shiller P/E clocked in at a reading of 38.37, which is just shy of its closing high of 38.89 for the current bull market. More importantly, it represents only the third time in 154 years where this valuation tool has topped a reading of 38 during a continuous bull market.

Widening the lens a bit further, there have only been a half-dozen occasions since January 1871 when the Shiller P/E has surpassed 30, including the present. Following the previous five instances, the S&P 500, Dow Jones, and/or Nasdaq Composite shed 20% to 89% of their value.

A historically pricey stock market has been a harbinger of trouble to come for Wall Street for more than 150 years, which is why earnings quality from America's most influential businesses is more important than ever. The problem is that a dollar in corporate profit isn't always what it's cracked up to be.

Some of Wall Street's most influential companies have an earnings quality problem

Businesses that offer cutting-edge innovations and/or possess seemingly insurmountable moats and competitive advantages have led the broader market higher. However, not all of these businesses are as amazing as they appear on the surface.

An ideal example of what I'm talking about is electric vehicle (EV) maker Tesla (NASDAQ: TSLA), which recently reported $8.99 billion in pre-tax income in 2024. Superficially, Tesla appears to be firing on all cylinders, with its energy generation and storage segment growing by double digits and the company registering its fifth consecutive year of generally accepted accounting principles (GAAP) profit. Most EV makers aren't even profitable.

But if investors really dig into Tesla's operating results, they'll find that $2.76 billion of its pre-tax income came from selling regulatory tax credits to other automakers, and another roughly $1.57 billion traces back to interest income generated from its cash. The company also recorded a $600 million mark-to-market gain on the value of its Bitcoin holdings during the fourth quarter. While I'm not faulting Tesla for taking advantage of these opportunities, it's worth pointing out that more than half of its pre-tax income originates from unsustainable, non-innovative sources.

Though the buzz surrounding Tesla ties into full self-driving, the incorporation of AI, robotaxis, and autonomous robots, the reality is that most of Tesla's income comes from regulatory credits given to the company for free by federal governments, interest income on its cash, and digital asset adjustments.

But this isn't just a Tesla problem. Poor earnings quality is a widespread issue among a number of prominent stocks.

Last week, AI-driven data-mining specialist Palantir Technologies (NASDAQ: PLTR) knocked Wall Street's socks off by reporting a re-acceleration of its growth rate. The company's Gotham platform, which aids federal governments with data collection and mission planning/execution, has helped propel the company's GAAP profits higher.

But amid Palantir's double-digit sales growth and 2025 revenue guidance that handily topped Wall Street's consensus is the reality that a significant portion of its pre-tax income derives from interest income earned on its cash. Palantir reported $489.2 million in pre-tax income in 2024, $196.8 million of which was interest income. Investors don't expect a company trading at 88 times TTM sales to be generating 40% of its annual pre-tax income from an unsustainable and non-innovative source like interest income.

Tech goliath Apple (NASDAQ: AAPL) serves as yet another example. The company behind the undisputed leading smartphone (iPhone) in the U.S. is expected to enjoy tailwinds from the incorporation of Apple Intelligence into its physical devices. Apple's AI model has the potential to reignite consumer interest in iPhone, Mac, and iPad.

Something else Apple is known for is its world-leading share repurchase program. Since the start of 2013, it's repurchased almost $750 billion worth of its common stock and lowered its outstanding share count by 43% in the process. Buybacks of this magnitude help to lift EPS and can make a company's stock appear more attractive to fundamentally focused investors.

But in Apple's case, buybacks have masked the stalling of its physical product growth engine and a notable decline in net income. Even though its full-year EPS has been fairly static thanks to its ongoing share repurchase program, net income has declined from $99.8 billion in fiscal 2022 (ended Sept. 24, 2022) to $97 billion in fiscal 2023 (ended Sept. 30, 2023) to $93.7 billion in fiscal 2024 (ended Sept. 28, 2024).

With the stock market historically pricey, corporate earnings can't be taken at face value. Regardless of how important or influential a company might be to fuelling Wall Street's rally, investors need to ensure businesses are producing quality profits and not those masked by unsustainable and non-innovative sources.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post The US stock market has an earnings quality problem — and it can't be ignored any longer appeared first on The Motley Fool Australia.

More reading

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Bitcoin, Palantir Technologies, and Tesla. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

For more than two years, the stock market has been virtually unstoppable. Last year, the iconic Dow Jones Industrial Average (DJX: .DJI), broad-based S&P 500 (SP: .INX), and innovation-inspired Nasdaq Composite (NASDAQ: .IXIC) galloped higher by 13%, 23%, and 29%, respectively, with all three indexes notching multiple record-closing highs.

Investors haven't needed to dig too deeply to locate the catalysts fueling this extended rally in equities. In no particular order, the powder keg of the current bull market includes:

• The rise of artificial intelligence (AI).
• Better-than-expected corporate earnings.
• A pullback in the prevailing rate of inflation from a four-decade high.
• A resilient U.S. economy.
• The return of Donald Trump to the White House.
• Investor euphoria surrounding stock splits.

While nothing has slowed this bull market rally, history has often shown that when things seem too good to be true, they usually are.

The stock market has reached this point on three occasions since January 1871

At any given time, there is bound to be a data point, metric, or forecasting tool that spells potential trouble for the U.S. economy and/or Wall Street. Some of the more recent examples include the first notable year-over-year decline in U.S. M2 money supply since the Great Depression, as well as the longest yield-curve inversion on record.

But among the "what if"s for the stock market, none screams louder than a valuation tool that's making history for only the third time in 154 years.

As the old idiom states, "value is in the eye of the beholder." Value is a relatively subjective term, and what one investor considers to be pricey might be viewed as a bargain by another.

The traditional valuation tool on Wall Street is the price-to-earnings (P/E) ratio, which divides a company's share price into its trailing-12-month earnings. While the P/E ratio is a quick value-comparison tool for mature businesses, it doesn't work particularly well with growth stocks and can get easily skewed during turbulent events, such as the COVID-19 pandemic.

A considerably more comprehensive valuation tool that allows for apples-to-apples comparisons is the S&P 500's Shiller P/E Ratio, which is also referred to as the cyclically adjusted P/E Ratio, or CAPE Ratio. The Shiller P/E is based on average inflation-adjusted earnings from the previous 10 years, which means that shock events won't be able to skew its readings.

S&P 500 Shiller CAPE Ratio data by YCharts.

When the closing bell rang on February 5, the S&P 500's Shiller P/E crossed the finish line with a reading of 38.23. For context, the average reading for the Shiller P/E when back-tested to January 1871 is just 17.2.

What's even more noteworthy is just how rare the magnitude of this deviation is above the historic average. Spanning 154 years, this marks only the third time during a continuous bull market that the S&P 500's Shiller P/E has reached a reading of at least 38.

The other two incidences include an all-time high in December 1999 of 44.19 and first week of January 2022 peak of just over 40. The former occurred just prior to the bursting of the dot-com bubble, which saw the S&P 500 and Nasdaq Composite respectively lose 49% and 78% of their value on a peak-to-trough basis. Meanwhile, the latter gave way to a bear market for the Dow Jones, S&P 500, and Nasdaq Composite between January 2022 and October 2022.

Widening the lens a bit further finds only six instances, including the present, where the Shiller P/E Ratio has surpassed 30 during a bull market in 154 years. All five previous occurrences were followed by declines ranging from 20% to 89% in at least one of the three major stock indexes.

Admittedly, the Shiller P/E isn't a timing tool and provides no clues as to when equities hit a temporary top. But when back-tested 154 years, it does have a flawless track record of foreshadowing eventual (and significant) downside in the stock market.

Time in the market trumps timing the market

While history rhyming and sending the stock market notably lower may not be what investors want to hear, there's a critical difference when it comes to trying to time short-term market moves and putting your money to work over long periods on Wall Street.

The blunt truth is that no matter how much we wish against stock market corrections, bear markets, crashes, and economic downturns, they're a normal and inevitable part of the respective investing and economic cycle. But what's vital to recognise is that cycles for the U.S. economy and stock market aren't mirror images of each other.

For example, the U.S. economy has worked its way through 12 recessions since World War II came to a close in September 1945. Spanning nearly eight decades, nine out of 12 recessions were resolved in less than a year. According to a report from the Congressional Research Service (CRS), the average recession from 1945 through 2009 endured just 11 months.

On the other hand, CRS notes the typical economic expansion stuck around for 58 months between 1945 and 2009, or nearly five years. Prior to the COVID-19 recession taking shape, the U.S. economy was enjoying an expansion that was over 10 years old. In other words, even though economic downturns are inevitable, they're historically short-lived.

This same cyclical nonlinearity can be seen on Wall Street.

The data set above was posted in June 2023 by the researchers at Bespoke Investment Group shortly after the benchmark S&P 500 was confirmed to be in a new bull market. It examines the length of every bull and bear market for this widely followed index dating back to the start of the Great Depression in September 1929.

In the 94-year period examined, the average S&P 500 bear market took 286 calendar days to complete, or about 9.5 months. What's more, the lengthiest bear market on record endured for 630 calendar days in the mid-1970s.

On the other hand, Bespoke's data set found the average of 27 S&P 500 bull markets lasted 1,011 calendar days, or roughly 3.5 times longer than the typical bear market. Further, if you include the current bull market rally (extrapolated to present day), over half — 14 out of 27 — of all bull markets have stuck around longer than the lengthiest bear market.

Short-term moves lower on Wall Street are virtually impossible to forecast. But history has conclusively shown that time in the market is far more valuable than trying to time the market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post The US stock market is doing something witnessed only 3 times in 154 years — and history makes clear what happens next appeared first on The Motley Fool Australia.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The last two-plus years have been paradise for optimists on Wall Street. Since the start of 2023, the iconic Dow Jones Industrial Average (DJX: .DJI), widely followed S&P 500 Index (SP: .INX), and growth stock-inspired Nasdaq Composite (NASDAQ: .IXIC) have respectively increased in value by 35%, 58%, and 89%, as of the closing bell on February. 6.

There is a slew of catalysts lifting the broader market higher, including the rise of artificial intelligence, strong corporate earnings, a decline in the prevailing rate of inflation, and more than a dozen high-profile companies announcing stock splits last year.

But perhaps nothing has been more influential for the stock market over the last three months than Donald Trump's election night victory. During Trump's first term in the White House, the Dow Jones, S&P 500, and Nasdaq Composite respectively rose by 57%, 70%, and 142%.

Wall Street appreciates the prospect of additional corporate tax cuts and deregulation, which can foster an uptick in merger and acquisition activity, as well as fuel stock buybacks.

However, not every action taken by President Trump is necessarily viewed as a positive by investors. With the president recently unveiling new sweeping tariffs, the question has to be asked: Can tariffs spark a stock market crash?

Tariffs have a decisively negative impact on the businesses exposed to them

A little more than a week ago, President Trump held true to his campaign promise of using tariffs to promote American interests by introducing a 25% tariff on select imports from Canada and Mexico, as well as a 10% tariff on imports from China.

Shortly after the tariffs on the United States' direct neighbours were announced, respective 30-day stays on imposing these 25% tariffs were put into place. However, the 10% tariff on China did go into effect, with the world's No. 2 economy retaliating with tariffs of its own, ranging from 10% to 15% on various American energy commodities and agricultural machinery.

The goal with tariffs is to protect domestic interests by making homemade products more cost-competitive with those being manufactured overseas. In other words, it promotes the "America first" ethos that President Trump campaigned on.

But based on a recent analysis conducted by Liberty Street Economics (Do Import Tariffs Protect U.S. Firms?), which publishes research reports for the Federal Reserve Bank of New York, public companies directly exposed to tariffs during Trump's first term did endure a decisively negative impact on their stock price.

The four economists who contributed to the analysis took a close look at the performance of stock returns from 2018 to 2019 when then-President Trump initiated tariffs on China. Perhaps unsurprisingly, companies that were directly exposed to China via imports and/or exports performed statistically worse on the days these tariff announcements were made than companies without exposure to China.

However, this wasn't the only disturbing correlation. Specifically, the companies that struggled and had direct exposure to President Trump's China tariffs also saw average declines in their profits, employment, sales, and labour productivity from 2019 to 2021. In other words, this weakness persisted well beyond initial tariff announcement days.

One postulation from the authors is that input tariffs make it difficult for domestic producers to be price-competitive with foreign producers. Even though tariffs are, on paper, designed to take care of this, the authors differentiate between output and input tariffs. Tariffs on finished products (i.e., output tariffs), such as cars, are where some U.S. tariffs are directed. But they're also imposed on inputs, which involve materials used for unfinished products (e.g., steel imports), and can work to increase prices on American-made goods, thereby making them less competitive on price.

While author evidence doesn't foreshadow a crash for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, history does point to a clear weakness in equities.

History is a pendulum that swings in both directions and overwhelmingly favours the patient

As much as investors would prefer stock market corrections, bear markets, and crashes simply not occur, what makes the stock market a "market" is the ability for equities to move in both directions. If history were to repeat itself, tariffs and trade tensions between the world's two leading economies would spell trouble for Wall Street.

History rhyming is nothing new for the stock market. But historic precedent can differ greatly depending on your investment horizon.

In June 2023, researchers at Bespoke Investment Group published a data set on social media platform X that examined the length of every bull and bear market in the S&P 500 dating back to the beginning of the Great Depression in September 1929. This 94-year period featured 27 separate bull and bear markets.

Bespoke's analysis found the average downturn of at least 20% in the benchmark index lasted only 286 calendar days, or in the neighbourhood of 9.5 months. In comparison, the typical S&P 500 bull market stuck around for roughly 3.5 times as long — 1,011 calendar days.

A recently updated study by Crestmont Research sheds further light on the importance of patience when putting your money to work on Wall Street.

Every year, Crestmont updates a data set that calculates the rolling 20-year total returns (including dividends) of the S&P 500 dating back to the start of the 20th century. Even though the S&P didn't officially exist until 1923, researchers were able to track the performance of its components in other major indexes in order to back-test return data to 1900.

Crestmont's rolling 20-year total return periods yielded 106 ending years (1919-2024). What's noteworthy is that all 106 rolling 20-year periods would have generated a positive total return. This is to say that if an investor had, hypothetically, purchased a security that mirrored the performance of the S&P 500 at any point since 1900 and simply held onto their position for 20 years, they would have made money every single time. It didn't matter if they purchased at a top or endured a crash-like event — they always came out a winner after 20 years.

The point is that even if President Donald Trump's tariffs roil the stock market in the short term, history clearly shows the positive long-term outlook for equities remains unchanged.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Will Donald Trump's new sweeping tariffs cause a US stock market crash? History couldn't be any clearer appeared first on The Motley Fool Australia.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This week, Donald Trump took the oath of office and a new era began for Wall Street.

Following his victory in November, the broader market was propelled higher, with financial stocks surging on the prospect of less oversight.

Additionally, many of the stock market's most influential businesses have jumped on the belief that Trump will target another round of corporate income tax rate cuts — at least for businesses that make their products in America. After the Tax Cuts and Jobs Act was signed into law by Trump in December 2017, stock buyback activity for S&P 500 (SP: .INX) companies soared.

Investors are also excited about the prospect of a repeat performance. During Trump's first term in the White House, the ageless Dow Jones Industrial Average (DJX: .DJI), benchmark S&P 500, and growth-powered Nasdaq Composite (NASDAQ: .IXIC) galloped higher by 57%, 70%, and 142%, respectively.

While Wall Street has been given plenty of reason to be excited about President Donald Trump's second term, he's also making ominous stock market history — and it should have investors concerned.

President Trump officially makes dubious stock market history

Among the dozens of presidents that have preceded Trump in the Oval Office, none can say they've inherited a pricier stock market.

The most common way to measure "value" on Wall Street is with the price-to-earnings (P/E) ratio. The P/E ratio is arrived at by dividing a company's share price into its trailing-12-month earnings per share (EPS), with a lower P/E ratio typically signifying a better value.

Though the P/E ratio is a fantastic tool for quickly assessing the relative cheapness or priciness of a mature business, it can be easily tripped up by short-term shock events that disrupt corporate earnings. For example, lockdowns during the COVID-19 pandemic in 2020 made trailing-12-month EPS relatively useless for a number of companies.

This is where the S&P 500's Shiller P/E Ratio comes into play. You'll commonly find the Shiller P/E Ratio also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio).

S&P 500 Shiller CAPE Ratio data by YCharts.

The Shiller P/E is based on average inflation-adjusted EPS over the prior 10 years. Using a decade of inflation-adjusted earnings history means that shock events can't skew this valuation metric. In other words, it provides as close to an apples-to-apples valuation measure as possible when back-tested more than 150 years.

As of the closing bell on January 17, the S&P 500's Shiller P/E sat at 38.11. This marks the highest reading for an incoming president dating back to January 1871 (i.e., as far back as the Shiller P/E can be back-tested). For context, the average Shiller P/E over the last 154 years is 17.19.

What's particularly concerning is what's happened during previous instances where stock valuations became extended to the upside.

Since 1871, there have only been six instances where the Shiller P/E has surpassed 30 during a bull market, including the present. Following the prior five occurrences, the Dow Jones, S&P 500, and/or Nasdaq Composite all shed 20% to 89% of their value. Although the timing of these peak-to-trough downturns has been unpredictable, the crystal-clear takeaway is that premium valuations aren't sustainable.

Even with most of President Donald Trump's policies viewed as favourable to corporate America, inheriting one of the priciest stock markets in history might pave the way for a bear market or short-lived crash during his second term.

History offers a silver lining for investors, too

Based solely on what history tells us, premium valuations for stocks aren't sustainable over very long periods. Eventually, the stock market is going to enter a period of correction and the Shiller P/E will retrace from one of its highest readings in history.

But it's not all bad news for investors — it just depends on your investment time frame.

In June 2023, the researchers at Bespoke Investment Group published a data set on social media platform X that compared the calendar-day length of every bear and bull market for the S&P 500 dating back to the start of the Great Depression in September 1929.

As you can in the post below, there were 27 separate bear and bull markets spanning 94 years. Whereas the typical bear market stuck around for only 286 calendar days, the average bull market endured for 1,011 calendar days, which is about 3.5 times as long.

This isn't the only evidence that suggests widening your investment lens and playing the long game is a winning approach.

Every year, Crestmont Research refreshes a published data set that calculates the 20-year rolling total returns (including dividends paid) for the S&P 500 dating back to 1900. Despite the S&P not coming into existence until 1923, Crestmont was able to track the performance of its components in other indexes from 1900 to 1923 to gather back-tested total return data.

Out of 105 rolling 20-year periods examined, with end years of 1919 through 2023, all 105 generated positive total returns. No matter what challenges Wall Street contended with, hypothetically buying and holding an S&P 500 tracking index for 20 years has been a profitable investment 100% of the time since the start of the 20th century.

What's more, investor returns were often sizable. Approximately 90% of these rolling 20-year periods generated an average annual total return of 6% or greater, while nearly half of all ending years produced annualised returns of at least 9%.

President Donald Trump making stock market history may serve as an ominous short-term warning for investors, but the long-term upward trajectory for equities remains firmly intact.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post President Donald Trump just made stock market history — and it's an ominous warning for investors appeared first on The Motley Fool Australia.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

When the curtain closed on 2024, investors were all smiles. The mature stock-driven Dow Jones Industrial Average, benchmark S&P 500, and growth-fueled Nasdaq Composite ended last year higher by 13%, 23%, and 29%, respectively.

A number of catalysts powered year two of Wall Street's bull market rally, such as Donald Trump's November victory (stocks soared during his first term in the White House) and excitement surrounding stock splits. But at the top of the list is the euphoria associated with the rise of artificial intelligence (AI).

Empowering software and systems with AI so they can become more proficient at their tasks and potentially learn new skills gives this technology a stratospheric ceiling. In Sizing the Prize, the analysts at PwC forecast a $15.7 trillion boost to global gross domestic product from AI by 2030.

No company has been a more direct beneficiary of the AI revolution than semiconductor giant Nvidia (NASDAQ: NVDA). Since 2023 began, Nvidia stock has added roughly $3 trillion in market value, with shares up a cool 830%, as of January 10.

But is this breakneck climb for Nvidia too good to be true? Let's allow history to be the ultimate judge of whether or not Nvidia stock can fall below $100 per share in 2025.

Nvidia's operating expansion has been textbook

Before digging into the details of what's to come, it's important to understand the dynamics of how we got here. Nvidia's ascension to briefly becoming America's largest publicly traded company is all about its leading role as the "brains" of high-compute data centres.

Based on a study conducted by semiconductor analysis firm TechInsights, data-centre graphics processing unit (GPU) shipments in 2022 and 2023, respectively, totalled 2.67 million units and 3.85 million units. Nvidia's GPUs were responsible for all but 30,000 GPUs shipped in 2022 and 90,000 GPUs shipped in 2023. Businesses simply can't get enough of its Hopper (H100) chip and next-generation Blackwell GPU architecture.

Insatiable demand for the company's hardware has led to tangible benefits. With demand swamping supply, Nvidia has been charging between $30,000 and $40,000 for its ultra-popular Hopper GPU. For context, this is well above the $10,000 to $15,000 price point Advanced Micro Devices was netting for its Instinct MI300X GPU. A higher price point translates to a notable uptick in Nvidia's gross margin.

Furthermore, the company's CUDA software platform has played a key role in keeping customers loyal to its ecosystem of products and services. CUDA is the toolkit developers rely on to maximise the computing potential of their Nvidia GPUs and to build large language models.

Lastly, Nvidia has benefitted from being the preferred AI-GPU supplier of America's most-influential businesses. It's top customers by net sales include many members of the "Magnificent Seven," such as Microsoft, Meta Platforms, Amazon, and Alphabet.

History weighs in on Nvidia's parabolic move higher

Now that you have a better idea of where Nvidia has been and how we got to this point where it's trading at around $136 per share, let's lean on history as a guide.

Regardless of how promising the next game-changing technology, innovation, or trend has been over the last couple of decades, there has always been competition waiting in the wings for its chance at a piece of the proverbial pie.

For the time being, Nvidia is the undisputed provider of GPUs in AI-accelerated data centres. However, its monopoly-like market share is virtually certain to ebb as new competition enters the arena. AMD, for example, is ramping up output of the MI300X and newly introduced MI325X, which are notably cheaper than Nvidia's chips and likely more accessible. Businesses that aren't interested in waiting for Nvidia's backlog to clear may consider less-costly alternatives like AMD.

Additionally, Nvidia's top customers by net sales are all developing AI chips to use in their data centres. Although the chips Microsoft, Meta, Amazon, and Alphabet are internally developing won't match the computing speed of Nvidia's Hopper and Blackwell GPUs, they'll be cheaper and more readily available. In other words, it begins minimising the AI-GPU scarcity that's fueled the lion's share of Nvidia's pricing power and gross margin improvement.

An end to AI-GPU scarcity would likely weigh on Nvidia's gross margin. NVDA Gross Profit Margin (Quarterly) data by YCharts.

On top of history telling us that competition is inevitable, a worrisome precedent has been set by market leaders of next-big-thing investment trends over the last three decades.

In the mid-1990s, the proliferation of the internet began offering new ways for businesses to connect with customers. However, it would be many years before most companies realised how best to monetise their online storefronts. Although the internet positively changed the growth trajectory for corporate America, this didn't occur until after the dot-com bubble burst.

Bubble-bursting events and next-big-thing investment trends have gone hand-in-hand, without exception, for decades. Though not a comprehensive list, we've witnessed bubbles burst for genome decoding, business-to-business e-commerce, nanotechnology, 3D printing, blockchain technology, and the metaverse.

The trait all of these high-dollar addressable trends have in common is investors overestimating the adoption and early-stage utility of a technology or innovation. Every game-changing technology/innovation needs time to mature, and it doesn't appear artificial intelligence has hit this point as of yet. Most businesses still lack a clear game plan of how they're going to generate a positive return on their AI investments.

Based on what history tells us, market leaders of next-big-thing trends typically lose 80% or more of their value on a peak-to-trough basis when the bubble bursts. Thankfully for Nvidia, it has well-established operating segments — e.g., GPUs used for gaming and cryptocurrency mining, as well as virtualisation software — that may be able to stunt its fall.

Nevertheless, history is quite clear that parabolic early-stage moves higher for market leaders of next-big-thing trends aren't sustainable, which makes a move below $100 in 2025 for Nvidia stock a very real possibility.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Will Nvidia stock fall below $100 in 2025? appeared first on The Motley Fool Australia.

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Sean Williams has positions in Alphabet, Amazon, and Meta Platforms. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Trump is about to make dubious history.

When 2024 came to a close, investors had every reason to smile. The iconic Dow Jones Industrial Average (DJX: .DJI), broad-based S&P 500 (SP: .INX), and growth stock-powered Nasdaq Composite (NASDAQ: .IXIC) ended the year higher by 13%, 23%, and 29%, respectively.

Catalysts have been aplenty, with the rise of artificial intelligence (AI), stock-split euphoria, and better-than-expected corporate earnings fueling year two of the bull market rally. But things really kicked into high gear following Donald Trump's November victory.

During Trump's first term in office, the Dow Jones, S&P 500, and Nasdaq Composite soared by 57%, 70%, and 142%, respectively. Trump's efforts to lower the corporate income tax rate and encourage deregulation lit a fire on Wall Street.

However, Trump will be making dubious history when he's inaugurated in just over a week — and this has nothing to do with serving nonconsecutive terms. Based on what history tells us, a stock market crash is within the realm of possible outcomes in 2025 under President Donald Trump.

Trump is inheriting one of the priciest stock markets on record

The "dubious history" Trump is set to make on January 20 is the inheritance of a historically pricey stock market.

When it comes to valuation tools, most investors are probably familiar with the traditional price-to-earnings (P/E) ratio, which divides a company's share price into its trailing-12-month earnings per share (EPS). This quick valuation measure often works great for mature businesses, but it can be easily tripped up when unpredictable shock events occur, such as the COVID-19 pandemic.

A considerably better measure of value is the S&P 500's Shiller P/E ratio, also commonly known as the cyclically adjusted P/E ratio (CAPE ratio). The Shiller P/E is based on average inflation-adjusted EPS from the previous 10 years. Analysing a decade of inflation-adjusted earnings history minimises the impact of shock events and allows for apples-to-apples valuation comparisons.

As of the closing bell on January 8, the S&P 500's Shiller P/E ratio stood at 37.58, more than double its average reading of 17.19 when back-tested to January 1871 and the third-highest reading during a continuous bull market.

S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.

What's particularly worrisome is what's happened in the wake of Shiller P/E readings above 30 throughout history. There have been only six occurrences in 154 years where the Shiller P/E has topped 30, including the present, and the previous five were eventually followed by declines ranging from 20% to 89% in the Dow, S&P 500, and/or Nasdaq Composite. In other words, premium valuations aren't tolerated over long periods.

And the S&P 500's Shiller P/E isn't the only valuation tool sounding alarm bells. The "Buffett Indicator," named after Berkshire Hathaway's investor extraordinaire Warren Buffett, hit an all-time high in December.

The Buffett Indicator, which divides the market cap of all publicly traded companies into U.S. gross domestic product (GDP), was labeled by the Oracle of Omaha as "probably the best single measure of where valuations stand at any given moment" in 2001. Whereas this market-cap-to-GDP ratio has averaged 85% (0.85) since 1970, it touched 209% in December 2024.

Both valuation metrics point to the growing likelihood of significant downside — perhaps including a brief crash — for the stock market in the new year.

Republican presidencies and recessions have historically gone hand-in-hand

Another concern based solely on history as Donald Trump prepares to take office is the strong correlation between Republican presidencies and downturns in the U.S. economy.

Before proceeding any further, let's make clear that recessions are a normal and inevitable part of the economic cycle. No amount of well-wishing or monetary/fiscal policy maneuvering can deter economic downturns forever.

With the above being said, there have been 10 Republicans and nine Democrats in the Oval Office since 1913. Whereas four Democrats didn't have a recession begin under the tenure, all 10 Republicans endured a recession while in office. This includes Donald Trump, who navigated America through the two-month recession that occurred during the pandemic.

Although the U.S. economy and stock market aren't tied at the hip, weakness in the U.S. economy tends to have a negative impact on corporate earnings. Based on a study by Bank of America Global Research, from 1927 through March 2023, in the neighbourhood of two-thirds of the S&P 500's peak-to-trough drawdowns occurred during, not prior to, a recession being declared.

While this strongly correlative data doesn't guarantee a recession will occur in 2025, a few predictive tools, such as the historic decline witnessed in the U.S. M2 money supply in 2023, suggest an economic downturn is coming.

History is quite clear about what happens to the broader market over long periods

Though there are tangible, history-based concerns as Donald Trump prepares to take office for his second term, the important thing for investors to remember is that history is a pendulum that swings in both directions. Even though it portends the likelihood of volatility in the not-too-distant future, there's also a very strong correlation between time and wealth creation on Wall Street.

For example, in June 2023, the researchers at Bespoke Investment Group shared a data set on social media platform X that compared the length of every bear and bull market for the S&P 500 dating back to the start of the Great Depression in 1929. The difference between bear and bull markets was night and day.

On the one hand, out of the 27 bear markets for the S&P 500 spanning 94 years, the average downturn lasted just 286 calendar days (roughly 9.5 months), with the longest decline clocking in at 630 calendar days. On the other hand, the typical bull market stuck around for 1,011 calendar days, with more than half (14 of 27) of all bull markets (including the present bull market) lasting longer than the lengthiest bear market.

The analysts at Crestmont Research took things one step further and examined the performance of the S&P 500 over rolling 20-year periods, inclusive of dividends, since the start of the 20th century. Even though the S&P 500 didn't exist until 1923, Crestmont was able to track its components to other indexes from 1900 through 1923 to obtain total return data.

Crestmont's rolling 20-year total return data for the S&P 500 yielded 105 ending periods (1919 through 2023). All 105 periods produced a positive total return, with at least 50 of these timelines generating an average annual total return of 9% or higher. Hypothetically, if you bought an S&P 500 tracking index at any point since 1900 and held that position for 20 years, you would have made money.

While there's no guarantee the stock market will crash in 2025 under President Donald Trump, history suggests it's a practical lock that the major indexes will generate a healthy total return for investors over the next 20 years.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post How likely is a US stock market crash under President Donald Trump in 2025? Here's what history tells us appeared first on The Motley Fool Australia.

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Sean Williams has positions in Bank of America. Bank of America is an advertising partner of Motley Fool Money. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bank of America and Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

There's arguably not a money manager on Wall Street that has the ability to command the attention of professional and everyday investors quite like Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett. In his six decades as CEO of Berkshire, he's overseen a cumulative return in his company's Class A shares of more than 5,460,000%, as of the closing bell on January 2.

Mirroring the Oracle of Omaha's trading activity, which can be done using Berkshire Hathaway's quarterly filed Form 13Fs, has been a seemingly surefire investment strategy for decades.

Even though Buffett has been a net seller of stocks to the tune of $166 billion over an eight-quarter stretch (October 1, 2022 through to September 30, 2024), he's still been buying shares of a select group of time-tested businesses.

As we turn the page to 2025, Buffett is betting big on the following five stocks.

Sirius XM Holdings

One of the most interesting stocks that Berkshire's chief can't stop buying of late is satellite-radio operator Sirius XM Holdings (NASDAQ: SIRI).

Sirius XM completed a merger with Liberty Media's Sirius XM tracking stock following the close of trading on September 9, and also effected a 1-for-10 reverse stock split. Whereas most companies conducting reverse splits do so to avoid delisting from a major stock exchange, Sirius XM was in no danger of delisting. Rather, its split seems solely focused on getting its stock back on the radar of institutional investors who won't purchase stocks trading below $5 per share.

The beauty of Sirius XM's operating model is twofold. First, it's a legal monopoly. There are no other licensed satellite-radio operators, which, more often than not, affords the company strong subscription pricing power.

The other attractive aspect of Sirius XM's operating model is that its primarily subscription driven. Whereas terrestrial and online radio companies rely almost exclusively on advertising revenue to keep the proverbial hamster on its wheel, Sirius XM generated close to 77% of its net sales from subscriptions and roughly 20% from advertising through the first nine months of 2024. The advantage of Sirius XM's approach is that its cash flow remains steadier during periods of economic uncertainty.

Additionally, Sirius XM stock is historically cheap, which is something the value-oriented Oracle of Omaha can appreciate. Amid a historically pricey stock market, Sirius XM is valued at just over 7 times forward-year earnings and its dividend yield is approaching an all-time high of 5%.

Occidental Petroleum

When 2022 began, Berkshire Hathaway held $10 billion worth of Occidental Petroleum (NYSE: OXY) preferred stock (yielding 8% annually), but not a single common share of stock. Over the last three years, Buffett and his top advisors, Ted Weschler and Todd Combs, have acquired 264,178,414 common shares of Occidental stock.

Historically, energy stocks haven't accounted for a sizable percentage of the portfolio Buffett oversees at Berkshire. But that's changed, with over $30 billion, combined, currently invested in Chevron and Occidental. It's a pretty clear signal that Buffett and his crew expect the spot price for crude oil to remain elevated.

Perhaps the biggest catalyst for oil is that global energy companies were forced to slash their capital expenditures (capex) for three years during the COVID-19 pandemic. Even though capex has returned to normal, increasing crude supply isn't going to happen overnight. When the supply of a high-demand commodity is constrained, it usually provides a lift to its spot price.

A higher spot price for crude is particularly impactful for Occidental Petroleum, which generates the lion's share of its revenue from its drilling operations. If the price of crude oil rises, operating cash flow for Occidental will disproportionately benefit, relative to its peers. Just keep in mind that the reciprocal is also true, with Occidental's cash flow being hit harder than other drillers when the spot price of crude declines.

Domino's Pizza

A third phenomenal business that Warren Buffett is betting big on in the new year is one of consumers' most beloved brands, Domino's Pizza (NASDAQ: DPZ). Domino's was the biggest buy made by Buffett and his crew during the September-ended quarter.

One of the business characteristics Domino's possesses that the Oracle of Omaha has previously emphasised the importance of to investors is trust. Roughly 15 years ago, Domino's marketing campaign admitted that its pizza wasn't very good and that it had to do better. Over time, the company's transparent marketing approach, along with process and product innovation, has worked wonders.

Something else that's finding the mark is Domino's five-year "Hungry for MORE" initiative. Introduced by CEO Russell Weiner in December 2023, Hungry for MORE emphasises a reliance on technology to improve output and product consistency, as well as leans on the company's franchisees to enhance the value of its brand.

The international opportunity for Domino's Pizza shouldn't be overlooked, either. The company is on track for its 31st consecutive year of international same-store sales growth. This speaks to its brand value and reliance on product innovation to drive growth.

Chubb

Another stock the Oracle of Omaha very clearly wants to own in 2025 is property and casualty insurance company Chubb (NYSE: CB). Chubb was the stock given "confidential treatment" that Buffett and his team built a sizable position in between July 2023 and March 2024.

What makes insurance stocks so desirable for value investors like Warren Buffett is the stability of their operating model and premium pricing power. When loss events occur, insurers like Chubb have reason to raise premiums. But they can also increase premiums when claim losses are low with the justification that catastrophe events are inevitable.

Chubb also benefits from the niche focus of its homeowner insurance segment. The company predominantly insures higher-value homes, which leads to more lucrative premiums. High earners are less likely than average-earning workers to adjust their spending habits or fail to pay their bills when economic disruptions occur.

Lastly, insurers like Chubb are reaping the rewards of the Federal Reserve undertaking its most aggressive rate-hiking cycle in four decades (from March 2022 through July 2023). Insurers invest their float — the premium collected that hasn't been paid out in claims — in safe, short-term Treasury bills. The higher the yield, the more interest income the company can generate.

Berkshire Hathaway

The fifth magnificent stock Warren Buffett is betting big on for 2025 is none other than shares of his own company, Berkshire Hathaway. Though the September-ended quarter marked the first quarter out of the last 25 that Buffett didn't repurchase Berkshire's shares, he's collectively bought back around $78 billion worth of his company's stock since mid-July 2018.

Since Berkshire Hathaway doesn't pay a dividend, buybacks serve a number of key purposes. For starters, they reward patient investors. A steadily declining share count gradually increases the ownership stake of existing shareholders. In short, it reinforces the long-term investing ethos that Buffett and the late Charlie Munger preached for decades.

Secondly, share repurchases can increase earnings per share (EPS) for companies like Berkshire Hathaway that have steady or growing net income. A 12.6% aggregate decline in Berkshire's outstanding share count since mid-2018 has increased the company's EPS and made it more attractive to fundamentally focused investors.

It could also be argued that ongoing share buybacks reinforce Buffett's belief in the company he's helped build over six decades. What better way to demonstrate to investors a belief that Berkshire is still undervalued than to purchase around $78 billion worth of stock in a little over six years.

Finally, with a record $325.2 billion in cash, cash equivalents, and U.S. Treasuries on Berkshire's balance sheet, the Oracle of Omaha has quite the buffer to repurchase his company's stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 5 US stocks Warren Buffett is betting big on for 2025 appeared first on The Motley Fool Australia.

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Sean Williams has positions in Sirius XM. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway, Chevron, and Domino’s Pizza. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Occidental Petroleum. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Roughly 30 years ago, the advent of the internet changed the growth trajectory for businesses across the globe. Although it took a few years for the internet to mature as a technology and for businesses to fully understand how to harness its potential, it's had a notably positive impact on long-term growth trends.

Since the mid-1990s, Wall Street has been waiting patiently for the next leap forward for corporate America. Over the last two years, artificial intelligence (AI) appears to have answered the call.

AI-driven software and systems have the ability to become more proficient at their assigned tasks, as well as learn new skill sets without human intervention. This capacity to learn and evolve over time is what gives this technology seemingly limitless potential and utility in most industries around the globe.

While the AI ecosystem is vast, which should allow numerous businesses to thrive, no company been a more direct beneficiary of the rise of AI than cutting-edge semiconductor stock Nvidia (NASDAQ: NVDA). Since 2023 began, Nvidia's market cap skyrocketed from $360 billion to north of $3.6 trillion, which makes it the largest publicly traded company, as of this writing.

Nvidia's operating expansion has been virtually textbook

Less than two years ago, when Nvidia lifted the hood on fiscal 2023 (Nvidia's fiscal year ends in late January), the company reported $27 billion in full-year sales. In the current fiscal year (2025), it's pacing closer to $129 billion in full-year revenue, with Wall Street calling for almost $192 billion in sales next year.

This otherworldly growth is a function of Nvidia's AI-graphics processing units (GPUs) being the preferred choice for businesses running high-compute data centres. The analysts at TechInsights pegged Nvidia's share of GPU shipments to data centres at 98% in 2022 and 2023. Based on the company's two-year sales ramp, it'd be a fair assumption that Nvidia's H100 GPU (commonly known as the "Hopper") and successor Blackwell GPU architecture aren't having any issues finding buyers.

Nvidia has also been able to take advantage of the law of supply and demand. With orders for the Hopper and next-generation Blackwell chip backlogged, it's been able to meaningfully increase the price for its hardware. The roughly $30,000 to $40,000 price tag for the Hopper represents a 100% to 300% premium to what Advanced Micro Devices is netting for its MI300X chips for AI-accelerated data centres.

Credit also needs to be given to Nvidia's CUDA software platform for its virtually textbook operating expansion. CUDA is the toolkit developers use to maximise the potential of their Nvidia GPUs, including building large language models. This platform has helped keep clients loyal to Nvidia's umbrella of products and services.

Although everything seems to be going perfectly for Nvidia, as its stock performance would suggest, one metric in the company's recently released third-quarter operating results (for the quarter ended Oct. 27) tells a different story.

This lone metric strongly suggests Nvidia stock has hit its peak

As expected, Nvidia's headline figures look as good as advertised. Quarterly sales jumped 94% from the year-ago quarter to $35.08 billion, while net income surged 109% to $19.3 billion. Both were well ahead of Wall Street's consensus forecast.

But there is one exceptionally important figure that's showing signs of weakness, and it foreshadows the very real possibility of the top being in for Nvidia stock.

When Nvidia lifted the hood on its first-quarter operating results in May, it reported a scorching-hot gross margin of 78.4%. The dramatic increase the company has enjoyed in its gross margin is a function of AI-GPU scarcity and its aforementioned exceptional pricing power.

NVDA Gross Profit Margin (Quarterly) data by YCharts.

The above chart isn't yet reflective of Nvidia's fiscal third-quarter gross margin of 74.6%.

However, the tide is turning. After delivering a 78.4% gross margin in Q1 2025, Nvidia reported a gross margin of 75.1% in Q2 2025 and 74.6% in the latest quarter. For the fiscal fourth quarter, it's forecasting a gross margin of 73% to 73.5%, +/- 50 basis points.

Although Nvidia's gross margin is notably higher now than it was prior to the AI revolution taking shape, this steady decline we're witnessing is evidence that AI-GPU scarcity is waning and competition is picking up.

Most of Wall Street is focused on the external competition Nvidia will have to contend with. AMD has been steadily ramping up production of its MI300X AI-GPUs and recently unveiled its next-gen MI325X chip, which it intends to put into production before the end of the year. AMD is a brand-name company with a rich history and a considerably cheaper AI-GPU than Nvidia's Hopper and Blackwell chips. Businesses wanting to gain first-mover advantages may be compelled to skip the potentially long wait for Nvidia's hardware and choose AMD.

But the bigger issue for Nvidia may very well be the competition it's facing from within. Many of the company's top customers by net sales are members of the "Magnificent Seven," and they're all internally developing AI-GPUs to deploy in their data centres. Even if these chips come up short to Nvidia's hardware in terms of computing capabilities, they're still markedly cheaper and more easily accessible.

Anything that reduces AI-GPU scarcity is going to adversely impact Nvidia's pricing power and its gross margin.

History would like a word, too

Based on the trend we're seeing from Nvidia's gross margin, its shares have likely topped. But history would like a word, as well.

Even though the internet transformed the business world three decades ago, it took time for the technology to mature and for businesses to properly utilise it to generate a positive return on their investment. Every next-big-thing innovation for 30 years, including the internet, has worked its way through an early innings bubble-bursting event.

What this tells us is that investors consistently overestimate how quickly a new technology will be adopted by consumers and/or businesses on a broad basis. It also suggests investors are overly optimistic about the utility of cutting-edge technologies. Though artificial intelligence can be every bit the game-changer that Wall Street expects it to be, it's going to take time for businesses to figure out how best to utilise AI. This is what leads to lofty expectations eventually falling short.

Investors are seeing this dynamic play out right in front of their eyes. Even with sizable investments in AI data centres from some of Wall Street's most-prominent companies, most of these businesses lack a clear game plan to generate a positive return on their AI investments any time soon. The utility aspect of AI isn't well understood at the moment -- and that's a scary thing for a company whose gross margin is in a decisive decline.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Has Nvidia stock topped? A single metric offers a very clear answer appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Nvidia. The Motley Fool Australia has recommended Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

During the mid-1990s, the arrival of the internet opened new doors for corporate America and altered its growth trajectory forever. But for more than a quarter of a century, professional and everyday investors have been pondering which transformative innovation would be next to rival what the internet did for businesses. Artificial intelligence (AI) appears to be the anointed answer to this long-standing query.

With AI, software and systems oversee tasks that would previously have been assigned to humans. What gives AI such broad-reaching potential — PwC believes artificial intelligence can add $15.7 trillion to the global economy by 2030 — is the capacity for software and systems to learn and evolve without human intervention.

Although AI stocks have been virtually unstoppable over the last 18 months, a shift in AI euphoria may be brewing, with Nvidia (NASDAQ: NVDA) being the culprit behind it.

Nvidia's operating ramp has been virtually flawless

Before I dig into the negatives, let's give credit where credit is due. Semiconductor titan Nvidia was able to harness its first-mover advantage to become the leading provider of graphics processing units (GPUs) in AI-accelerated data centers.

Based on an analysis from the researchers at TechInsights, Nvidia accounted for 3.76 million of the 3.85 million GPUs that were shipped to enterprise data centers last year. For those of you wondering, this represents a cool 98% market share.

On top of its first-mover advantage, Nvidia holds clear-cut computing advantages over its competition. While Intel (NASDAQ: INTC) and Advanced Micro Devices (NASDAQ: AMD) are attempting to play catch-up to Nvidia's in-demand H100 GPU, Nvidia is readying to roll out its next-generation GPU architecture, known as Blackwell. In June, CEO Jensen Huang also teased the successor to Blackwell, known as Rubin, which is expected to hit the market in 2026.

The demand for Nvidia's chips has also overwhelmed their supply. When an in-demand good is in tight supply, it's not unusual for the sales price of said good to meaningfully increase. Nvidia has been able to boost its H100 to (at one point) north of $40,000 per chip. The end result is a notable expansion in the company's adjusted gross margin to 78.35% during the fiscal first quarter (ended April 28).

The AI revolution has lifted Nvidia's shares by 706% since the start of 2023, which has boosted its market cap by more than $2.7 trillion. It's this historic scaling from one of Wall Street's most influential businesses that compelled the company's board to complete a 10-for-1 stock split in June.

However, Nvidia's glory days may prove to be short-lived.

Nvidia's own forecast is an ominous warning of challenges to come

No matter how high the bar has been set, Nvidia has hurdled Wall Street's revenue and profit forecasts in each of the previous five quarters. But the company's adjusted gross margin forecast for the fiscal second quarter provides an ominous warning for Wall Street and investors that shouldn't be ignored.

Nvidia's second-quarter guidance calls for its adjusted gross margin to come in at 75.5%, plus or minus 50 basis points. This would mark a 235 to 335 basis-point decline from the 78.35% adjusted gross margin reported in the fiscal first quarter.

In one respect, a 75.5% adjusted gross margin is about 10 percentage points higher than where things stood in early 2022. A 75% to 76% adjusted gross margin is still phenomenal for a business the size of Nvidia.

NVDA GROSS PROFIT MARGIN (QUARTERLY) DATA BY YCHARTS.

On the other hand, this represents the first expected decline in adjusted gross margin since the summer of 2022. More importantly, it looks to be a clear warning that the otherworldly pricing power Nvidia has enjoyed is beginning to dissipate.

Intel and AMD haven't been shy about their desire to chip away at Nvidia's hardware monopoly in enterprise data centers. Intel unveiled its Gaudi 3 AI accelerator chip in April, with plans of a ramped-up commercial launch during the third quarter. Meanwhile, AMD has been beefing up production of its MI300X AI-GPU, which is considerably cheaper than the H100 GPU.

Although some aspects of the Gaudi 3 and MI300X offer competitive edges over Nvidia's H100, the latter holds a clear-cut compute advantage. The problem for Nvidia is that it's nowhere close to meeting the demand of its customers. As a result, Intel and AMD shouldn't have any trouble finding a strong market for their AI-GPUs in the coming months.

Furthermore, Nvidia's top four customers by net sales — Microsoft, Meta Platforms, Amazon, and Alphabet — are internally developing AI-GPUs for their respective data centers.

Similar to Intel and AMD, these in-house chips are unlikely to rival the compute capacity of Nvidia's H100 or Blackwell architecture. But they are going to take up valuable real estate in AI-accelerated data centers. The development of these AI-GPUs also provides a pretty clear message that America's most influential businesses aim to reduce their reliance on Nvidia's hardware going forward.

The bulk of Nvidia's growth over the last five quarters can be traced to its pricing power. With Intel and AMD set to flood the market with additional chips, and four "Magnificent Seven" companies developing AI chips for internal use, the AI-GPU scarcity that's fueled Nvidia's adjusted margin ramp is going to disappear. Nvidia's forecast decline in adjusted gross margin likely speaks to these pricing pressures, which I believe will only grow stronger in subsequent quarters.

But wait — there's more

In addition to Nvidia's own forecast seemingly portending trouble, history hasn't been all that kind to next-big-thing innovations, technologies, and trends.

When examined over long periods, some hyped trends have made investors considerably richer (e.g., the internet), while others ended up face-planting (e.g., 3D printing and cannabis stocks). But one thing every single next-big-thing innovation or trend has had in common since the mid-1990s is that they all endured a bubble-bursting event early in their existence.

To be clear, there's no way to precisely forecast when the music will stop or the euphoria will fade when it comes to a game-changing technology or buzzy trend. But when looking in the rearview mirror, there hasn't been a single instance for three decades where investors didn't overestimate the adoption and/or utility of a new technology or trend.

While some investors might be of the opinion that artificial intelligence has the ability to buck this unwritten rule, the reality is that most businesses lack a well-defined blueprint for how AI is going to increase sales and profits. This, by definition, demonstrates an overestimation of adoption and/or utility of this game-changing technology.

I strongly believe there's a path for artificial intelligence to meaningfully improve global productivity and provide consumption-side benefits when looking 10 or 20 years into the future. But over the next year or two, I expect it to become painfully apparent to Wall Street and everyday investors that most businesses have no real plan to generate a return on their AI investments.

With history as my guide, and Nvidia's guidance as my confirmation, I fully expect the AI bubble to burst sooner rather than later.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Opinion: This Nvidia forecast all but confirms that the artificial intelligence (AI) bubble will burst sooner rather than later appeared first on The Motley Fool Australia.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Intel, and Meta Platforms. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Intel and has recommended the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

You might not realize it, but two weeks ago marked one of the most important data releases of the quarter. November 14 was the last day for money managers and wealthy individuals with at least $100 million in assets under management to file Form 13F with the US Securities and Exchange Commission.

A 13F lets Wall Street professionals and everyday investors have a look under the hood to see what the brightest minds on Wall Street bought, sold, and held in the most recent quarter. Even though 13Fs have their flaws -- they're at least six weeks old by the time they're filed, meaning additional trades may have been made -- they can help investors identify the companies and trends garnering the attention of top money managers.

Although most billionaire money managers have used the 2022 bear market as an opportunity to buy high-quality companies at a discount, others haven't been able to run to the exit quickly enough. What follows are three ultra-popular stocks billionaires have been busy selling.

Tesla

There's arguably no stock billionaires sold more aggressively during the third quarter than electric-vehicle (EV) manufacturer Tesla (NASDAQ: TSLA). All told, five billionaire money managers pressed the sell button, including Jim Simons of Renaissance Technologies, Jeff Yass of Susquehanna International, Philippe Laffont of Coatue Management, Ken Griffin of Citadel Advisors, and Israel Englander of Millennium Management. Simons reduced his fund's stake by 99.9%, while the four other billionaire fund managers reduced their stakes by 16% to 55%.

Why run for the exit? One reason may be the realization that Tesla isn't immune to the cyclical challenges facing the auto industry. Tesla has historically been valued at a nosebleed premium to legacy automakers on the notion that it'll outpace these stalwarts in the sales and profit-growth department. However, COVID-related supply chain disruptions, especially in China, coupled with historically high inflation and a weaker US and global economic outlook, bode poorly for near-term EV sales.

Perhaps an even bigger downside catalyst is Tesla's own CEO Elon Musk. Although Musk is a visionary who's been largely credited with helping Tesla become one of the world's largest publicly traded companies, he's also become a significant liability for the company. Aside from the significant distraction of operating social media site Twitter, a large number of promises regarding the debut of new vehicles or innovations have failed to come to fruition. Tesla's valuation is very much dependent on Musk's visions becoming reality.

On the bright side, Tesla is profitable on a recurring basis, and the ramp-up at its two new gigafactories (Berlin, Germany, and Austin, Texas) should allow production and sales to quickly scale. But maintaining its North American market share will undoubtedly prove difficult as legacy automakers and newer players scale their own EV operations.

Walt Disney

Disneyland may be the "Happiest Place on Earth," but Walt Disney (NYSE: DIS) has been nothing short of a frowny face for billionaire investors. During the third quarter, billionaires Ole Andreas Halvorsen of Viking Global Investors, Simons of Renaissance Technologies, and Ray Dalio of Bridgewater Associates, all sold shares. In particular, Halvorsen and Dalio completely exited their respective fund's positions in Disney.

The about-face we've witnessed in Disney stock can likely be explained by two factors. First, the company still hasn't put its operating issues tied to the COVID-19 pandemic into the rearview mirror. China's zero-COVID strategy continues to hamper Disney's theme-park operations. Additionally, traditional moviegoing hasn't come close to achieving its pre-pandemic level.

The other issue is that Walt Disney's streaming services are racking up some jaw-dropping losses as they scale. While direct-to-consumer revenue rose 8% in the company's fiscal fourth quarter (ended Oct. 1, 2022), the segment's operating loss nearly doubled to $1.5 billion.  Poor operating performance is not something Disney shareholders are used to.

However, the subscriber figures at Disney+ (164.2 million) have ramped up incredibly fast, and the company appears confident the segment will turn the corner to profitability by the end of fiscal 2024.

What's more, Walt Disney has exceptional pricing power and the ability to engage consumers like no other media company. In short, these billionaire sellers may ultimately regret their decision.

Meta Platforms

The third ultra-popular stock billionaires were busy selling in the third quarter is social media behemoth Meta Platforms (NASDAQ: META). Billionaires Stephen Mandel of Lone Pine Capital, Griffin of Citadel Advisors, and Simons of Renaissance Technologies, all slashed their stakes in Meta by multiple millions of shares from the sequential second quarter.

Perhaps the biggest knock against Meta is a weakening macroeconomic outlook for the US and global economy. Advertising is one of the first spending categories to be hit when the winds of recession begin blowing. Given that Meta generates 98% of its revenue from advertising, its top and bottom line are directly impacted by economic weakness.

Another plain-as-day concern billionaires have about Meta is CEO Mark Zuckerberg's exorbitant spending on the metaverse -- the 3D virtual world that allows users to interact with each other and their environment. Reality Labs, the company's metaverse operations, recorded $1.4 billion in sales through the first nine months of 2022, but racked up a jaw-dropping $9.4 billion in losses.  Worse yet, spending is expected to increase in 2023. The end result has been reduced free cash flow and lower quarterly profits.

But as with Walt Disney, I'm skeptical of the skeptics. Meta owns four of the most popular social media assets on the planet (Facebook, Facebook Messenger, WhatsApp, and Instagram) and should benefit from strong pricing power during extended periods of economic expansion.

Furthermore, Meta is sitting on a healthy net cash pile totalling nearly $32 billion. The company has levers it can pull if it wants to boost its free cash flow. The point being that Meta Platforms' operating model is so dominant, and its balance sheet so flush with cash, it has the financial flexibility to make aggressive investments in the metaverse. After all, the metaverse could be the next multitrillion-dollar opportunity.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 ultra-popular stocks billionaires have been busy selling appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Meta Platforms, Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Meta Platforms, Inc., Tesla, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool Australia has recommended Meta Platforms, Inc. and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

You probably don't need the reminder, but this has been an abysmal year for Wall Street professionals and everyday investors, alike. Since hitting their all-time highs between mid-November 2021 and the first couple of days of January, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) have respectively plummeted by as much as 22%, 28%, and 38%. That put all three -- at least briefly in the case of the Dow Jones -- firmly in a bear market.  

Over the past six weeks (or a bit longer for the Dow), all three indexes have given optimists a reprieve. In fact, the Dow Jones is now considerably closer to an all-time high than a fresh year-to-date low. But in spite of this bounce, one billionaire money manager is sounding the warning on Wall Street.

This highly successful billionaire's actions speak louder than words

Approximately two weeks ago on Nov. 14, money managers and wealthy individuals with more than $100 million in assets under management were required to file Form 13F with the Securities and Exchange Commission. A 13F provides a snapshot of what the brightest minds on Wall Street held in their portfolios at the end of the most recent quarter. It also sheds light on what they've been buying and selling.

The standout 13F for the third quarter wasn't Berkshire Hathaway's Warren Buffett. Rather, it was billionaire hedge-fund manager David Tepper of Appaloosa Management. Tepper, who owns the NFL's Carolina Panthers franchise, is estimated to be worth $18.5 billion, making him one of the world's richest people.

Based on Appaloosa's 13F filing, the fund ended the third quarter with stakes in 22 securities. Tepper's hedge fund completely sold out of eight holdings and reduced its stake in another 12 remaining positions.

Meanwhile, Tepper didn't buy one share of a single stock or warrant in the September-ended quarter. That's $1.36 billion in assets under management and not one penny deployed to buy equities at a seemingly reduced valuation. 

In an October interview with CNBC, Tepper was asked whether he liked the risk-versus-reward for stocks, given the current interest-rate environment. Tepper bluntly replied, "I don't think there's any great asset classes right now." He also went on to claim:

I don't love stocks. I don't love bonds. I don't love junk bonds.

Although Tepper echoed Buffett's sentiment that stocks are a great tool for long-term wealth building, he was quite clear nothing appears attractive, given interest-rate uncertainty, for the time being. 

Effective Federal Funds Rate data by YCharts.

A multitude of metrics suggest the stock market will head lower

Tepper's very clear warning for Wall Street jives with a number of metrics and historic data points that would seem to suggest the broader market has yet to hit bottom. For example, Federal Reserve monetary policy has, to some degree, foretold market bottoms -- but probably not in the way you might think.

Whereas a lot of investors are looking forward to an eventual Fed "pivot" and easing of interest rates, bear markets over the past quarter of a century show that stock market bottoms tend to occur well after rate-easing begins. Following the beginning of rate-easing cycles during the dot-com bubble (2001), financial crisis (2007), and prior to the COVID-19 pandemic (2019), it respectively took 645 calendar days, 538 calendar days, and 236 calendar days for the S&P 500 to bottom. This would suggest there's a long way to go until stocks find their trough.

A couple of valuation-based metrics spell trouble for Wall Street, as well.

The S&P 500 Shiller price-to-earnings (P/E) ratio (also known as the cyclically adjusted price-to-earnings ratio, or CAPE ratio) is front and center on the warning list. All five instances where the S&P Shiller P/E has crossed above 30 during a bull market rally since 1870 have eventually resulted in a decline of at least 20% for the S&P 500. Further, over the past 25 years, the S&P Shiller P/E ratio has bottomed out during most corrections and bear markets around 22. The Shiller P/E was 29.5, as of Nov. 23, 2022.           

The S&P 500's forward-year P/E ratio is another concern. With the exception of the Great Recession, the broad-based index has bottomed with a forward P/E of 13 to 14 on numerous occasions since 1995. Its forward P/E on November 23 was 17.5.

Even outstanding margin debt, which I've previously expounded on in greater detail, suggests the bear market bottom isn't in.

Take Tepper's advice... all of it

If this multitude of metrics and historic data points are accurate, the short-term pain for investors may well extend into 2023 and validate David Tepper's cautious tone. But it's important to digest everything Tepper had to say about the stock market in his interview with CNBC.

Even though the successful billionaire was clear with both his actions and words that there's nothing worth buying at the moment, he noted on multiple occasions the value of buying equities for the long term. This bit of sage advice has never been wrong -- at least when examining the major indexes.

According to data provided by sell-side consultancy firm Yardeni Research, there have been 39 separate declines of at least 10% in the S&P 500 since the beginning of 1950.  Every single last one of these crashes, corrections, and bear markets were eventually cleared away by a bull market rally. This holds true for the Dow Jones Industrial Average and Nasdaq Composite, too.

What's more, timing the stock market has proved far less important than how much time you spend in the market. A study by Crestmont Research found that if an investor were to have hypothetically purchased an S&P 500 tracking index at any point from 1900 onwards and held that position for at least 20 years, they would have generated a positive total return, including dividends paid, every single time! Crestmont found that the rolling 20-year total returns averaged 10.9% or higher on an annual basis in more than 40% of the 103 ending years it examined (1919 through 2021). 

In other words, even though things appear bleak now, it's as good a time as any to put your money to work if you have a long-term mindset and companies on your radar that are continuing to execute their strategies and visions. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post One of the world's richest investors just sounded a big-time warning for Wall Street appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• Here are the 10 most shorted ASX shares
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• How to invest in ASX shares when you don't know what to buy
• Are Fortescue or Rio Tinto shares the better buy?

Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

From time to time, Wall Street provides a not-so-subtle reminder to the investing community that stocks can move lower.

Since achieving their all-time closing highs between mid-November 2021 and the first week of January 2022, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), widely followed S&P 500 (SNPINDEX: ^GSPC), and growth stock-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) have respectively plummeted by as much as 22%, 28%, and 38%. This means all three major U.S. indexes have had at least a brief taste of a bear market in 2022.     

Regardless of how long you've been investing, bear markets can make you question your resolve to stay the course. In particular, the 2022 bear market has a lot of folks wondering where the bottom might be. Although no indicator, metric, or statistic has accurately predicted the start or finish of every bear market, one telltale bear market indicator does have an exceptionally strong track record of forewarning investors.

This bear market metric indicates more trouble is ahead for Wall Street

Looking back as far as 1870, the S&P 500 Shiller price-to-earnings (P/E) ratio has foretold the coming of five bear markets. The Shiller P/E, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), takes into account inflation-adjusted earnings from the previous 10 years.        

While on the surface the Shiller P/E is just another valuation tool, it's accurately predicted a coming bear market anytime it's crossed above 30 and sustained that level. This includes peaking above 30 in 1929 ahead of the Great Depression, topping out at 44 during the dot-com bubble, surpassing 30 in the third quarter of 2018 and just prior to the coronavirus crash, and once more (briefly) surpassing 40 during the first week of 2022. The short version is that anytime the S&P Shiller P/E ratio tops 30 during a bull market, a decline in the S&P 500 of at least 20% eventually follows (key word, "eventually").

S&P 500 Shiller CAPE Ratio data by YCharts.

But the Shiller P/E ratio can be just as useful forecasting where a bear market will bottom. With the exception of the financial crisis (2007-2009), a number of double-digit percentage retracements in the S&P 500 over the past quarter of a century have found their bottom when the S&P 500 Shiller P/E hit 22 (give or take a point or two in each direction). This isn't all that surprising given that professional and everyday investors often become more critical of stock valuations during bear market declines.

I'm sorry to say, but this telltale bear market indicator is, once more, sounding a warning that the broader market has yet to find its bottom -- at least if history proves accurate. The latest bounce following a lower-than-anticipated U.S. inflation rate briefly pushed the S&P Shiller back above 29.  Though anything is possible, no bear market has ever bottomed with the Shiller P/E as high as it is now.

Considering that a number of high-profile companies have begun to temper their outlooks, all signs would appear to point to a bumpy road for equities to end 2022 and/or begin 2023.

This "warning" is your opportunity to pounce

Although the S&P Shiller P/E ratio has a time-tested track record of being right, it's not perfect. But there is something that does have a perfect track record: The S&P 500 itself.

As I've previously pointed out, time is the greatest ally investors have. Trying to predict where the market will be a year from now is nothing more than a crapshoot. However, the longer you hold, the greater your chance of being correct and building wealth.

According to data compiled by market analytics company Crestmont Research, there's hasn't been a 20-year rolling period since 1900 where the S&P 500 has failed to deliver a positive total return, including dividends paid. In other words, if you hypothetically bought and held an S&P 500 tracking index for 20 years, you made money 103 out of 103 times (with every year from 1919 through 2021 representing the end years for these rolling 20-year periods). Most of the time, investors made a boatload of money, with more than 40% of these 103 end years resulting in an average annual total return of at least 10.8%. 

If you're worried about "getting in too early," consider this: There have been 39 separate double-digit percentage declines in the S&P 500 since the beginning of 1950. With the exception of the current bear market, all 38 previous crashes, corrections, and bear markets were eventually cleared away by a bull market.  Once again, it doesn't really matter when you buy, so long as you give your investment(s) ample time to play out and prove your thesis correct.

I should also state that this isn't unique to the S&P 500. Every crash, correction, and bear market in the Dow Jones Industrial Average and Nasdaq Composite were also eventually whisked away by bull markets.

In short, if the Shiller P/E ratio is sounding a warning, it's often a great time for opportunistic long-term investors to pounce.  

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post This Telltale bear market indicator is sounding a warning, once again appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Broker says this ASX 200 bank stock could rise almost 70%
• Here are the 10 most shorted ASX shares
• Want to invest in the future? These technology ETFs are killing it
• How to invest in ASX shares when you don't know what to buy
• Are Fortescue or Rio Tinto shares the better buy?

Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What a difference a year makes! In 2021, the worst decline investors endured was a menial 5% swoon in the benchmark S&P 500 (SNPINDEX: ^GSPC). This year, the S&P 500 has entrenched itself in a bear market, with a peak-to-trough decline of 28%. What's more, it produced its worst first-half return since Richard Nixon was president.

Other widely followed indexes have fared poorly, too. The timeless Dow Jones Industrial Average (DJINDICES: ^DJI) briefly entered a bear market with a peak 22% decline, while the tech-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) has plummeted as much as 38% from one year ago.

The $64,000 question: Where will the stock market bottom out?

Both the uncertainty and velocity of downside moves during bear markets can play on the emotions of investors and coerce rash decision-making. It's what has new and tenured investors alike wondering when and where the stock market will bottom out.

To be perfectly blunt, if there were a foolproof indicator that accurately forecast when bear markets will occur, how long the drop will last, and where the bottom would be, every investor on the planet would be using it by now. Because catalysts differ for every stock market decline, and investor emotions/reactions are never precisely the same to these declines, there's simply no concrete way to know in advance when or where the stock market will bottom out.

But that doesn't mean there aren't indicators that have exceptionally successful track records of guiding the investment community in the right direction.

Over the past couple of months, I've looked at a number of metrics that offer a lengthy history of (fairly) accurately predicting when bear markets will occur, how steep the decline will be, or when/where the stock market will bottom out. This includes everything from valuation-based indicators to traditional metrics like outstanding margin debt. I even recently offered a correlation between Federal Reserve monetary policy and stock market bottoms.

But there's yet another way to forecast stock market bottoms: sentiment-based indicators.

This investor sentiment measure has historically been an excellent buy signal

While there are plenty of metrics and gauges that are designed to measure how greedy or fearful investors feel at any given moment, a technical indicator could prove far more useful at identifying prime buying opportunities. Specifically, I'm talking about the percentage of S&P 500 stocks trading above their respective 200-day moving average.

Moving averages are a technical analysis staple that average the share price of a company over a defined period. The assumption being that moving averages will provide some level of support or resistance, depending on what side of the moving average line a stock finds itself on.

But moving averages by themselves aren't particularly useful. They tell us nothing about what makes a company tick or what catalysts are in its future. Moving averages can, however, provide an accurate look at investor sentiment.

Throughout history, investors have made it a habit of shooting valuations too far to the upside during bull markets and becoming too pessimistic during bear markets. By examining the percentage of S&P 500 stocks above their 200-day moving average and comparing that figure to historic figures, we can identify moments where investors overshot to the upside or downside.                       

At the moment, 37.6% of the roughly 500 companies that comprise the S&P 500 are trading above their 200-day moving average. That's not a particularly telling figure one way or the other. However, since the beginning of 2002, there have been a dozen instances where the percentage of S&P 500 stocks above their 200-day moving average fell below 18%. Each of these instances has represented an incredible buying opportunity.

But there is a caveat to this investor sentiment indicator: it's not for short-term traders. Just because investor sentiment is poor, it doesn't mean it can't get worse.

During the depths of the Great Recession in 2009, the percentage of S&P 500 stocks above their 200-day moving average didn't bottom out till it hit just 1%! In other words, this isn't an indicator that'll precisely tell you when a bear market bottom will occur. Rather, it offers a successful history of accurately forecasting the approximate bottom of the most widely followed stock market index by alerting investors to overly negative investor sentiment.

History is on the side of long-term investors

But this isn't the only metric that can put some pep in investor's step. Historically speaking, every sizable stock market decline has represented a surefire buying opportunity for long-term investors.

According to sell-side consultancy firm Yardeni Research, the S&P 500 has declined by at least 10% on 39 separate occasions over the past 72 years. In short, stock market corrections, and even bear markets, are probably more common than you realize. Yet in each of these instances (save for the current bear market), a bull market rally eventually recouped all that was lost. Given time, "this too shall pass" will prove right, once more.

To take things a step further, data has shown that the S&P 500 has never let investors down if they're willing to buy and hold a tracking index for 20 years. Based on data published by market analytics company Crestmont Research, the rolling 20-year total return, including dividends paid, for the S&P 500 since 1900 has never been negative.  In plain English, it means that no matter when you bought an S&P 500 tracking index since the beginning of 1900, you walked away richer as long as you held for 20 years. This means now is as good a time as any for patient investors to put their money to work on Wall Street.  

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post This indicator has an incredibly successful track record of forecasting stock market bottoms appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Broker says this ASX 200 bank stock could rise almost 70%
• Here are the 10 most shorted ASX shares
• Want to invest in the future? These technology ETFs are killing it
• How to invest in ASX shares when you don't know what to buy
• Are Fortescue or Rio Tinto shares the better buy?

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This year has served an unpleasant but necessary reminder that the stock market doesn't move up in a straight line. Since the beginning of 1950, there have been more than three dozen double-digit percentage corrections in the broader market. Of course, few have been as painful as the bear market we're experiencing now.

However, pain historically brings with it opportunity on Wall Street. When given enough time, every stock market correction and bear market throughout history has been wiped away. That makes bear markets an especially intriguing time to do some shopping.

Arguably one of the best places to begin your search for stocks to buy is the Dow Jones Industrial Average (DJINDICES: ^DJI). The Dow Jones is a 126-year-old index comprised of 30 historically profitable, time-tested, multinational businesses. In other words, these are mature companies that have proved their worth over decades (or more than a century), and they could make smart buys during the bear market decline.

What follows are three attractively priced Dow stocks that have the capacity to turn an initial investment of $400,000 into $1 million by 2028.

Salesforce

The first Dow Jones Industrial Average stock with the tools needed to turn a $400,000 investment into a cool $1 million over the next six years is cloud-based customer relationship management (CRM) software solutions provider Salesforce (NYSE: CRM).

The biggest headwind Salesforce is contending with is the growing likelihood the US or global economy will enter a recession. It's not uncommon for growth stocks to see their valuation multiples contract during recessions as investors become more focused on traditional metrics (e.g., price-to-earnings ratios). Thankfully, Salesforce has a clear-cut edge in the CRM software space that commands a premium valuation.

For those wondering, CRM software is what allows businesses to enrich existing relationships with their customers to generate more revenue. It can cover simple tasks, such as resolving product or service issues, as well as handle more complex chores, like running predictive sales analyses to determine which customers would be likely to buy a new product or service. Keep in mind that while CRM software is perfectly designed for service-oriented companies, it's gaining plenty of traction in the healthcare, industrial, and financial arenas.

What makes Salesforce special is its absolute dominance of the CRM software space. It's been ranked as the No. 1 CRM solutions provider for nine consecutive years, according to IDC, and accounted for close to 24% of worldwide CRM spend in 2021. While Salesforce's share of the CRM market has grown every year since 2017, its top four competitors have shrunk to a combined 19.6% market share.  In short, Salesforce won't be knocked off its pedestal in this double-digit annual growth category anytime soon.

As noted previously, co-founder and co-CEO Marc Benioff has done a phenomenal job of using bolt-on acquisitions as a source of growth. A steady diet of deals has broadened the company's service ecosystem and provided additional cross-selling opportunities.

If Benioff's forecast of $50 billion in annual sales by the end of fiscal 2026 proves accurate -- this would mark just shy of 100% growth from fiscal 2022 -- Salesforce would have a very good chance to generate 150% returns over the next six years. 

Boeing

A second Dow Jones stock that has the ability to turn a $400,000 initial investment into $1 million by 2028 is commercial airline and military aircraft manufacturer Boeing (NYSE: BA).

If there's a Dow stock that perfectly embodies the battle of short-term risk versus long-term reward, it's Boeing. Although the COVID-19 pandemic ravaged the airline industry for a period of about two years, many of the company's issues have been self-inflicted. This includes having its lauded 737 MAX cumulatively grounded for two years due to mechanical and electrical issues, as well as dealing with a roughly 15-month stretch (May 2021-August 2022) where 787 Dreamliner deliveries were halted. 

The key point here is that it's a lot easier to fix internal shortcomings than it would be to deal with persistent demand issues. With 787 deliveries back on track and the company expected to boost 737 MAX output from 27 planes monthly at the beginning of this year to 47 per month by the end of 2023, operating cash flow could really begin to ascend over the next 12 months. 

Something else investors should take into account is that Boeing's backlog remains robust. Through the first half of 2022, Boeing had $372 billion in orders on backlog, including more than 4,200 commercial planes.  Considering that the global energy supply chain is somewhat broken following the pandemic and Russia's invasion of Ukraine, crude oil, and therefore jet fuel prices, are liable to remain high. This could be the spark to encourage commercial airlines to order more fuel-efficient aircraft.

Boeing's defense, space, and security division is another positive for long-term investors. Since most government contracts span multiple years, revenue and operating cash flow for this segment tend to be highly predictable from one year to the next. 

Owning Boeing stock will require patience. But if the company can use the next six years to right the ship and simply get back to where it was on an operating basis prior to the pandemic, it should be able to deliver a 150% return to its shareholders from its current level.

Visa

The third Dow stock that can turn $400,000 into $1 million by 2028 is payment processor Visa (NYSE: V).

One of the most interesting things about Visa is that its biggest headwind at the moment is also one of its greatest catalysts. Visa is a cyclical business, which means that it fires on all cylinders when the US and global economy are expanding, and it struggles when recessions arise and consumers/enterprises spend less. With a number of pundits expecting a US recession, it's no wonder we've witnessed weakness in shares of Visa.

But here's the thing about being cyclical: It strongly favors the patient. Virtually every period of expansion lasts substantially longer than contractions or recessions. This is what allows Visa to grow in lockstep with the US and global economy over time.

Visa finds itself well-positioned for high-single-digit or low-double-digit growth domestically and internationally. In the US, Visa held a 54% share of credit card network purchase volume, as of 2020.  Among the four major processors in the US, none gobbled up more share following the Great Recession than Visa. Meanwhile, it has a multidecade opportunity to expand into emerging market regions considering that most overseas transactions are still being conducted in cash.

A generally conservative management team is a feather in Visa's cap, too. While it could easily enter the lending arena and generate interest income, Visa chooses to focus on payment processing. This choice means the company isn't directly affected by rising loan delinquencies or credit losses during a recession. Not having to put cash aside to cover losses is what allows Visa to emerge from inevitable economic downturns in such great shape.

It's rare that a nearly $395 billion company can sustain a 10%+ growth rate over a long period, but that's exactly what long-term investors are getting with Visa.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 Dow Jones stocks that could turn $400,000 into $1 million by 2028 appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Sean Williams has positions in Visa. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Salesforce, Inc. and Visa. The Motley Fool Australia has recommended Salesforce, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This has been a challenging year all the way around for the investing community. Since notching their respective all-time highs between mid-November and the first week of January, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), widely followed S&P 500 (SNPINDEX: ^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) have all plummeted into a bear market. The bond market hasn't provided much of a safety net, either, with bonds delivering what may well be their worst year in history!

The good news -- if there's any to be found among this market tumult -- is that every substantive decline in the major U.S. stock indexes has always represented a buying opportunity for patient investors. But this doesn't change the fact that heightened volatility and the growing prospect of a U.S. recession has investors on edge and wondering, "When will the bear market bottom?"

Multiple metrics suggest the stock market is headed lower

Over the past couple of months, I've highlighted a number of indicators that have had solid success at calling previous bear market bottoms.

For example, outstanding margin debt has an uncanny track record of predicting bear markets. Margin debt being the amount of money borrowed from brokerages with interest to purchase or short-sell securities. When the amount of margin debt rises rapidly, it's often a sign of increased risk-taking by investors -- and an ominous warning for the stock market.

In the three instances since the beginning of 1995 where margin debt rocketed higher by 60% or more in a trailing-12-month (TTM) period, the stock market peaked not long thereafter and entered a bear market. Margin debt plummeted by more than 40% on a TTM basis to signal bottoms for each of the previous two bear markets (2002 and 2009). The current TTM decline in outstanding margin debt is a little over 20%, implying more downside to come.

Valuation-based indicators have signaled additional downside is likely, too. The S&P 500 Shiller price-to-earnings ratio (also known as the cyclically adjusted price-to-earnings ratio, or CAPE ratio) has accurately predicted bear markets five times since 1870. More importantly, a number of previous double-digit percentage declines found their respective bottoms around a Shiller P/E of 22. The current Shiller P/E is still above 27.   

Further, the S&P 500's forward price-to-earnings ratio is still marginally higher than the 13 to 14 multiple that has signaled the bottom for a number of pullbacks over the past quarter of a century.

Here's the indicator I'm watching closest to help identify a bottom

However, none of these aforementioned indicators is my absolute favorite when it comes to predicting bear market bottoms.

To be clear, there is no such thing as a perfect predictor of bear market bottoms. If there was, you can rest assured that everyone from Wall Street professionals to everyday investors would be using it by now. Nevertheless, this particular metric has proved quite useful during double-digit percentage declines over the past two decades. I'm talking about analyzing the percentage of stocks in the Nasdaq Composite trading above their 200-day moving average.

Moving averages are used by technical analysts who believe the average price of a stock over a given period provides some form of support. But I'm not thinking of this indicator in this respect. Rather, I'm using the percentage of stocks within the index (Nasdaq) that's led the market higher and lower for the past quarter of a century as a gauge of investor sentiment.

Historically, investors have a tendency to become overly optimistic during bull markets and push valuations into the stratosphere. Likewise, they can become overly bearish and overshoot to the downside during short periods of pessimism. This indicator helps recognize when those peak periods of pessimism arrive and are a signal for investors to pounce.  

Over the past 20 years, there have been six instances where roughly 12% or fewer of all Nasdaq-listed stocks were above their 200-day moving average. This includes the 2002 dot-com bubble bottom (12.12%); 2009 Great Recession bottom (5.23%); first quarter pullback in 2016 (11.29%); fourth quarter of 2018 pullback (10.11%); COVID-19 crash bottom (7.01%), and June 2022 (8.81%).  Although predicting precisely where this metric will bottom is impossible, a value of 12% or less has historically represented an incredible buying opportunity and has pretty closely called most bear market bottoms.   

As of this writing, following the close of business on Oct. 17, 2022, only 22% of Nasdaq-listed companies were above their 200-day moving average.

Buying stocks during bear markets is a genius move -- here's why

But just because I'm keeping a close eye on this bear market bottom indicator, it doesn't mean I haven't been putting money to work on a regular basis during this downturn. That's because any double-digit percentage decline in the broader market is, historically, a smart time to invest -- at least for long-term investors.

As I've previously pointed out, market analytics company Crestmont Research publishes the rolling 20-year total returns, including dividends paid, of the S&P 500 every year. For example, the rolling 20-year total return for 1997 would include years 1978 through 1997 and include all dividends paid.

In total, Crestmont has examined 103 end years (1919-2021), which means it's evaluated every 20-year holding period since 1900 for the S&P 500. The key takeaway is that no 20-year rolling period has produced a negative total return. Whereas you can count on one hand how many end years finished with an annual average total return of 5% or less over 20 years, there are around 40 ending years where the average annual total return over two decades was 10.9% at minimum. 

Patience has continually paid off handsomely for investors, which is why you're a genius if you're putting your money to work during this significant bear market downturn.      

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post When will the bear market bottom out? This indicator may hold the answer appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Broker says this ASX 200 bank stock could rise almost 70%
• Here are the 10 most shorted ASX shares
• Want to invest in the future? These technology ETFs are killing it
• How to invest in ASX shares when you don't know what to buy
• Are Fortescue or Rio Tinto shares the better buy?

Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Though you probably don't need the reminder, it's been an abysmal year for professional and everyday investors alike. Since hitting their respective all-time highs between mid-November and the first week of January, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-dependent Nasdaq Composite (NASDAQINDEX: ^IXIC) have plunged by as much as 22%, 26%, and 34%, through Oct. 10, 2022, and are firmly in the grips of a bear market.

Regardless of whether you're a tenured or new investor, bear markets can be scary. The velocity and unpredictability of moves lower are enough to make investors question their willingness to stick around. Of course, history also shows that buying during these bear market dips is the smartest thing patient investors can do.

The thing is, the stock market might not be anywhere near a bottom.

This risk-focused indicator portends new lows for the stock market

To be fair, if there were an indicator that perfectly called stock market corrections and bear markets, as well as market bottoms, everyone would be using it by now. There simply isn't an indicator that can accurately predict where the stock market will move next 100% of the time.

However, there are a handful of indicators with impressive track records. Select valuation-based indicators portend the S&P 500, Dow Jones, and Nasdaq will ultimately head lower. But it's an oft-overlooked risk indicator -- outstanding margin debt -- that could really tell the tale of where the broader market heads next.

"Margin debt" describes the amount of money investors have borrowed from their broker, with interest, to buy or short-sell securities. Although some trading activity requires the use of margin, such as short-selling, most outstanding margin debt is viewed as a snapshot of risk tolerance. In other words, margin is usually used as a tool to increase leverage or exposure to a security or the broader market.

Over time, it's perfectly normal for the amount of outstanding margin debt to increase in lockstep with the overall value of the stock market. What isn't normal is when the amount of outstanding margin debt skyrockets over a short time frame.

FINRA Margin Debt data by YCharts.

Since the beginning of 1995, there have been three instances where margin debt surged 60% or more on a trailing-12-month (TTM) basis. This happened immediately prior to the dot-com bubble bursting, just months before the financial crisis took shape, and in March of last year. Upward percentage spikes in margin debt have preceded three of the past four bear markets (the one-month coronavirus crash being the exception).  

Not only has outstanding margin debt been a good predictor of an eventual bear market, but it's done a good job of forecasting bear market bottoms. When the dot-com bubble and financial crisis found their respective troughs, TTM declines in margin debt ranged between 40% and 50%. Current TTM declines in margin debt are only down a little over 20%. The implication is that we'd need to see additional unwinding of margin-based positions before a true market bottom is in place.

For added context, the S&P 500 subsequently lost 49% and 57% of its respective value the previous two times margin debt skyrocketed by 60% or more in a 12-month stretch. It's lost a peak of "just" 26% of its value in 2022.

Here's why you're smart to buy stocks during bear market declines

But the interesting thing about peril on Wall Street is that it also breeds opportunity. For investors, there's been no greater ally than time.

If you were to bet on which direction the stock market would head over the next 12 months, your chance of being correct is around 50%. But if your bet spans multiple decades, your chance of being correct goes way up.

Every year, market analytics company Crestmont Research publishes data on the rolling 20-year total returns, including dividends paid, of the S&P 500 and expresses this data as an average annual total return. Crestmont has done this for 103 ending years (1919-2021). For example, if you wanted to know the rolling 20-year total return for 1939, Crestmont would factor in the total returns for years 1920 through 1939 and express it as an annual average total return.

Here's the interesting part: Out of the 103 end years examined, every single one -- I repeat, every single one -- produced a positive average annual total return over 20 years. No matter when you bought an S&P 500 tracking index since the beginning of 1900, you made money as long as you held onto that position for 20 years.

Something else worth pointing out is that most folks would have made quite a bit of money. You can count on one hand the number of end years that produced an average annual total return of between 3.1% and 5%. By comparison, approximately 40% of these 103 end years delivered an average annual total return ranging from 10.9% to 17.1%. 

In case you need even more evidence that being patient and optimistic is a winning strategy, consider this: The average double-digit percentage correction in the S&P 500 since the beginning of 1950 has lasted just 189 calendar days or about six months. Although we're dealing with a longer bear market decline at the moment, history conclusively shows that bull markets last disproportionately longer than corrections.

Eventually, this bear market will share the same fate as others before it and be placed in the rearview mirror by a bull market rally. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post This bear market risk indicator suggests we could head a lot lower appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• How to invest in ASX shares when you don't know what to buy
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.  

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

You probably don't need me to tell you this, but 2022 has been one of the most challenging years on record for everyone from Wall Street professionals to everyday investors. The first half of the year saw the benchmark S&P 500 (SNPINDEX: ^GSPC), which is the broadest barometer of stock-market health, produce its worst return in 52 years. The growth-dependent Nasdaq Composite (NASDAQINDEX: ^IXIC) fared even worse, with the index losing as much as a third of its value on a peak-to-trough basis.

With two of Wall Street's big three indexes falling into bear market territory -- the timeless Dow Jones Industrial Average (DJINDICES: ^DJI) maxed out at a peak decline of 19% -- and testing the resolve of investors, the critical question has become: "Where will the bear market bottom?"

While the official answer is that we don't know with any certainty, history offers a number of very clear clues as to where the S&P 500 could trough. In particular, two indicators provide a range of where we can expect the bear market to bottom.

Valuation plays a key role during bear markets

Whereas Wall Street is willing to tolerate higher valuations when the U.S. and global economy are firing on all cylinders, analysts and investors become much more critical of stock valuations when corrections and bear markets arise. That's why the S&P 500's forward-year price-to-earnings (P/E) ratio can come in handy.

The S&P 500's forward P/E divides the aggregate point value of the S&P 500 Index into the consensus earnings per share forecast for Wall Street in the upcoming year (in this instance, 2023).

With two exceptions -- the Great Recession between 2007 and 2009, where valuations were truly depressed given the uncertain state of the U.S. financial system, and the double-digit percentage pullback for the broader market in 2011 -- the S&P 500's forward P/E has accurately predicted the bottom of every other notable decline since the mid-1990s. Specifically, we've witnessed the benchmark index's forward-year P/E bottom between 13 and 14. This is where the S&P 500 found its bottom following the dot-com bubble in 2002, during the nearly 20% pullback in the fourth quarter of 2018, and following the coronavirus crash.

As of Aug. 31, the S&P 500's forward-year P/E stood at 16.8. Based on the noted range of 13 to 14, this would imply further downside to the S&P 500 of 16.7% to 22.6%. In other words, as long as the earnings component of the benchmark index doesn't drastically change, this indicator would imply a bear-market bottom between 3,061 and 3,296.

Margin debt tells a grimmer story

While the S&P 500's forward-year P/E ratio provides an upper bound of where history would suggest the bear market is headed, outstanding margin debt tells a more worrisome story.

"Margin debt" describes the amount of money being borrowed, with interest, by investors to purchase or short-sell securities. Although it's perfectly normal for margin debt to increase over time as the value of U.S. equities grows, it's anything but normal to see margin debt rise significantly, on a percentage basis, over a short period.

Since 1995, there have only been three instances where margin debt increased by 60% or more on a trailing-12-month basis. It occurred immediately prior to the dot-com bubble bursting in 2000, just months prior to the financial crisis taking shape in 2007, and once more in 2021. Following the previous two instances where margin debt skyrocketed in excess of 60% in the trailing-12-month period, the S&P 500 lost 49% and 57% of its respective value before finding a bottom.

If we simplify this to a general loss of 50% of the S&P 500's value, the bottom range for the index, based on what margin debt history tells us, is 2,409 (half of the 4,818 intra-day high).

In other words, two leading indicators with a history of successfully calling a number of bear-market bottoms suggest the S&P 500 could fall to 2,409 in a worst-case scenario, or bounce up to 3,296 if corporate earnings hold up better than expected.

^SPX data by YCharts.

The one figure more powerful than any bear-market-bottom indicator

Obviously, these indicators could be wrong, and the June 2022 bear-market low of 3,636 could hold firm for the S&P 500. If there were indicators that were right 100% of the time, every Wall Street professional and retail investor would be using them by now.

Regardless of whether the S&P 500, Nasdaq Composite, and Dow Jones industrial Average have already found their respective bottoms or still have additional downside, one figure does offer a practical guarantee -- and all it requires is your patience.

Every year, stock-market analytics provider Crestmont Research publishes data highlighting the 20-year rolling total returns (which include dividends paid) for the S&P 500 since 1919. In other words, Crestmont is looking at the average annual total return investors would have made by buying and holding an S&P 500 tracking index for 20 years over each of the past 103 end years (1919-2021). 

The result? Investors made money 103 out of 103 times if they purchased an S&P 500 tracking index and held it for 20 years. What's more, approximately 40% of these 103 end years produced an average annual total return of at least 10.9%. Investors weren't just scraping by holding an S&P 500 index. They were doubling their money about every seven years in roughly 40% of all rolling 20-year periods.

That means that investors shouldn't be afraid to put money to work on Wall Street either now or in the future. If you're a long-term investor, time is a far more powerful ally than any bear-market bottom indicator.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Where will the bear market bottom? History offers a very clear clue appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Broker says this ASX 200 bank stock could rise almost 70%
• Here are the 10 most shorted ASX shares
• Want to invest in the future? These technology ETFs are killing it
• How to invest in ASX shares when you don't know what to buy
• Are Fortescue or Rio Tinto shares the better buy?

Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.