9th June 2025

Index Movement Last Week

S&P500+1.5%
Nasdaq+2.0%
Aussie ASX200+1.0%

There are probably more important things to talk about this week but I have been captivated by the spat between Trump and Musk. Two grown men throwing insults at each other in the most public of forums. They have definitely fallen out and it is hard to see a way back.

It like an episode of Real Housewives…….

Musk does not like Trumps Big Beautiful Bill Act. He claims it will cause too much debt and predicts a recession in the second half of this year. Trump says Musk “lost it” when told Electric Vehicles will no longer be promoted. Tesla’s stock fell 14% on Thursday so the market thinks Musk will lose this one.

I remember a story from History lessons in school. King Louis 14th turned on his trusted lieutenant, Nicolas Fouquet, had him arrested and confiscated his property. Elon could well be standing on thin ice here.

He managed to alienate the left when he joined Trump in the DOGE department and now he is losing friends on the right by publicly disagreeing with their policy.

To be fair to Musk, he has a point. It seems all politicians run the same playbook and buy votes. We saw it here in Aus with Labour promising everyone a benefit with no plan of how to budget for it. Trumps tax cuts are similar and will increase debt. Governments have learnt to just borrow the money to win votes and let someone else sort it out later.

Many say this will end in catastrophe, but that isn’t necessarily true. They can inflate it out. The US government first went into debt to fund their war of independence from England by borrowing money from France. ( I don’t think I have ever talked about France but that’s twice in one week). Every president since then has increased this debt. The US has gone from nothing to the worlds largest superpower in 200 years by constantly increasing their debt. If it has worked for 200 years why is it suddenly going to break now?

I read a story this week about Pete Peterson. Peterson was co-founder of Blackstone and a former Commerce Secretary. In the early 2000’s he used to frequently talk about the unsustainability of the US budget. 25 years later and people are saying the same thing. Except stocks are now 5x. Being afraid is very rarely good for your wealth.

Maybe it will break one day. But that is not today. The markets will give a clear message of warning if it is becoming a problem. But rather than be worried about debt and tariffs, traders are on full buy mode with the S&P500 topping 6000 once again this week.

But that 6000 level does make me think about valuations.

The S&P is now trading around 22.7x 2025 earnings estimates and 20.6x 2026 estimates.

To be bullish large cap stocks here you must believe either that earnings will be higher than estimates (rarely happens to a significant degree) or that valuations will expand to a new high. Forward year valuations peaked out at 22.0x in 2020. So there is precedent to say prices can continue to climb from here.

One could even build an argument that the introduction of AI will increase company profit margins and therefore justify higher valuations.

I’ve always been a value investor. I like to buy when things are cheap so buying here is not normal for me. However, in recent years I have begun to change my tune.

As a stock investor, the only question we need to really ask is – will someone else want to pay more for this stock in the future? That person might not pay much attention to valuations and rather just jump on the band wagon.

Another realisation I have come to recently is that investors find it very hard to correctly value tech and the disruption it causes.

If you think about the opposite, that tech is very easy to value then you shouldn’t get large increases in stock prices because everyone finds it easy to predict the future earnings and therefore can easily decide on a price today for what that company will be in the future.

This is clearly not the case. We do see large changes in tech company prices because investors cannot accurately predict the future of tech.

All of which makes me come to the conclusion that yes, Tech can continue to climb from here as the AI story throws another unknown into the mix and it is a powerful enough story to increase valuations.

Which brings me back to Tesla and Elon Musk.

I found out last week that Musk did not start Tesla. The idea came from two guys who tried (and failed) to make the first Kindle. But that is another story.

I’ve struggled with Tesla because I kept thinking of it as a car company. But the market struggles to price it because it does not know how to value autonomous driving.

There is a possible storyline. If they can make autonomous driving work (I can’t see how it is allowed for quite some time) then all Tesla needs to do is roll out a software update (all the cars connect to the internet) and suddenly the Tesla that sits on your driveway when you are not using it can become a cash generator for you as it signs itself up to Uber and drives passengers around for you. Your car could become your second income.

How do you value something like that?

I can’t, but I can see a reason why an exposure to Tesla makes sense. Last week’s sudden drop in price gives you a new entry point.

Who would have thought the Real House Wives of the White House episode last week would have made me change my mind on a ridiculously valued stock?

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.