A strange thing happened to the US stock market in 2015. The S&P 500 Index dropped by a bit under 2%, or by 36 points. Take out the top 10 performers and the decline rises to 5%. These are:


The top ten performers added 60 points, almost double the S&P’s 2016 loss. By far the best performer was Amazon, which more than doubled during 2016; if you didn’t own Amazon, you had a miserable year. Close behind were Google and Microsoft.

Even stranger, Amazon didn’t make any money during the first three quarters of 2015; its return on equity was negative for the period. Amazon spends vast amounts of capital to gain market share in the hope that one day its future earnings will justify a forward price/earnings ratio of more than 1,400. That would be an adventerous speculation in a small tech stock position, but it’s not a small tech stock: it’s the S&P market leader. In 2014, the market leader was Apple, which returned 40% on the premise that the world’s appetite for gadgets was bottomless. Apple lost money in 2015, falling nearly 30% from its February high of 133 to close at 105.

So here’s the reason to buy stocks (or not): The US consumer is going to drive economic growth, except that most consumer companies will lose money trying to capture this growth (US department stores represented in the S&P 500 for example lost 32%, because Amazon is taking away their business). Only a handful of companies–the e-commerce giants and the software firms that service them–will make money, except they’re not making money now. If you believe in Amazon’s profits, clap your hands.

It may not be quite as crazy as February 2000, when the S&P 500’s P/E exceeded 30, driven by bubbly tech valuations. But it’s disturbing to think of how much of equity valuations today are driven by Amazon’s 1,400 P/E. Where there are earnings, the market doesn’t believe they will continue, and where the market thinks there will be earnings, there aren’t any earnings today. Asia Unhedged thinks the story is silly.

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