Tesla And Nvidia Investors Dangerously Delude Themselves Of Reality

Stock prices anticipate the future. But such wishful thinking is reaching extreme levels in some S&P 500 stocks.

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More than 80% of the prices of three S&P 500 stocks, Tesla (TSLA), Eli Lilly (LLY) and Nvidia (NVDA), are based on expected earnings in the future, says Nicholas Colas of Datatrek Research. That’s much higher than the 55% of the S&P 500’s value pinned to future results.

Such a high value on the unknown future underscores just how speculative trading in some of the largest S&P 500 companies has become.

“Current valuations imply earnings will double, and in some cases double again, at U.S. Big Tech companies. Given the obvious power of AI, it’s not hard to see how markets arrive at those assumptions,” Colas said. “Still, there is a lot of faith in that outcome baked into Big Tech stock prices just now.”

Hope And A Prayer For Tesla

Shares of electric vehicle maker Tesla are the most extreme example of investors betting big on the future.

A whopping 91% of Tesla’s stock price is based on expected future earnings, Colas found. That’s the highest percentage in the S&P 500. That’s a clear sign Tesla is a “faith-based stock,” Colas said, not firmly rooted in current profit reality.

Much hinges on the company’s delayed announcement of self-driving taxis. “If Tesla shows a turnkey autonomous vehicle and provides a specific near-term time frame for its rollout, then markets will likely impute even greater future value than today,” he said. “If the details provided are hazy, then the stock will be at risk of another drop. Either way, there is not much room for error.”

Not All Tech Giants Hinge So Much On Future

More than 90% of Tesla’s stock price is based on future profit. And more than 80% of Nvidia’s is. But not all S&P 500 tech stocks are so speculative.

Just 61% of Alphabet‘s (GOOGL) stock price is based on future results. That’s only slightly higher than Berkshire Hathaway‘s (BRKA). And only 65% of Meta Platforms‘ (META) stock price is based on the future.

“Price momentum is a powerful force in capital markets, so we do not expect Big Tech stocks to suddenly lose steam,” Colas said. “But it is still worth knowing just how much good news investors expect from this group.”

Betting On The S&P 500 Future

S&P 500 stocks’ percent of value from expected profit

Source: Datatrek