Encouragement to produce numerous offspring given by Simon Brown
In the dynamic landscape of the US stock market, the current valuation of Costco, the membership bulk-buying warehouse business, is significantly higher than its own longer-term average. This observation holds even when compared to the broader market.
The historic average of the Nasdaq earnings multiple is about 20, a figure that Costco's longer-term average earnings multiple approaches but does not quite reach. However, the current valuation of Costco stands out among US market businesses due to its high earnings multiple.
The high valuations in US markets, including the Nasdaq's earnings multiple, are driven by strong investor optimism. This optimism is particularly surrounding growth areas like Artificial Intelligence (AI) and productivity gains, combined with expectations for sustained earnings expansion. The Nasdaq's current earnings multiple is elevated well above historical averages, reflecting this optimism and higher future earnings expectations.
Specific factors contributing to these elevated valuations include AI-driven optimism, strong demand for stocks, market benchmarks at historic highs, and mixed economic signals. AI-driven optimism sees investors pricing in strong future earnings growth from AI-related companies, pushing valuations higher than seen even during the 2000 dot-com bubble peak.
Despite risks and warnings of potential complacency and risks such as tariffs or recession, the overall expectations of disinflation, a capital spending boom, and a weaker US dollar supporting exporters sustain high valuations.
Costco, as a large-cap company benefiting from stable earnings growth and resilient consumer demand, reflects this environment. While Costco is less speculative than many AI firms, it exemplifies quality companies that can justify higher valuations through consistent cash flows and growth.
However, Costco's earnings multiple of just under 50, higher than the broader market, raises concerns about a potential market bubble or overvaluation in the US markets. The current valuations in US markets, both including and excluding Costco, are at extreme levels. The five-year average of the Nasdaq earnings multiple, excluding Costco, is about 30, while the current Nasdaq earnings multiple is in the mid-30s, with Costco's high earnings multiple contributing to this trend.
In summary, US market valuations, with the Nasdaq particularly exposed, remain historically high due to optimistic earnings growth expectations fueled by AI and productivity improvements, sustained stock demand, and favorable economic projections. However, these valuations surpass past bubbles, raising cautions about a potential correction.
The high earnings multiple of Costco, a large-cap business in the membership bulking warehousing sector, has attracted personal-finance investors despite concerns about potential market bubbles due to its consistency in cash flows and growth. Conversely, the elevated valuations of US markets, both in the business and finance sectors, are driven by optimism surrounding growth areas, such as Artificial Intelligence (AI), which has pushed valuations higher than even the 2000 dot-com bubble peak.
