Have you heard of Aeva Technologies?
This innovative company is based in Mountain View, California, right in the Silicon Valley hub. Aeva specializes in creating LiDAR sensors intended for self-driving cars and robotics.
Utilizing a cutting-edge technology known as frequency-modulated continuous wave (FMCW), Aeva’s sensors can measure both distance and speed simultaneously—a capability referred to as 4D LiDAR.
The excitement surrounding 4D LiDAR is palpable, especially among investors. Despite a recent market pullback, Aeva’s stock price has surged by an astonishing 1,000 percent over the past year.
However, there’s a catch: Aeva isn’t generating profits; instead, it reported a net loss of $152.26 million last year. Although its revenue is on the rise, predictions indicate that the company will continue to show negative earnings per share through the fiscal year 2025.
Aeva isn’t alone in its financial struggles, as speculative investors seem to be drawn to several profit-draining companies. For instance, Carvana, a company known for its unique used car vending machines, has seen its stock price climb over 133 percent since hitting a low on April 7. Similarly, shares of Avis Budget Group have soared by more than 250 percent since March 13, despite reporting nearly $2 billion in net losses during the fourth quarter of 2024.
What is driving this frenzy?
Steve Sosnick, chief strategist at Interactive Brokers, recently made an insightful observation:
“We’re not yet seeing a full-fledged ‘flight-to-crap,’ but it is clear that the motivation behind many of these stocks’ activity is something other than disciplined considerations of discounted cash flows.”
This preliminary ‘flight to crap’ is indeed speculative in nature and could gain momentum, transforming the current stock market bubble into an even larger crisis before it eventually implodes.
Moonshots
Experiencing stock market bubbles can be thrilling. They promise a glimpse into a futuristic landscape that may or may not materialize, offering significant rewards for reckless risk-takers.
The imminent revolution in self-driving cars seems increasingly tangible, with services already available in cities like Phoenix, San Francisco, Los Angeles, Austin, and Atlanta, and plans to expand to Washington D.C. and Miami by 2026.
The most captivating stock market bubbles arise when promising new technologies coincide with a pre-existing bubble. Aeva has found a sweet spot within the current AI boom, leading to remarkable gains.
Aeva’s 4D LiDAR may well benefit from advancements in autonomous vehicle technology, potentially turning its financial losses into profit. Alternatively, there may be lucrative opportunities in applying this technology to different sectors, such as industrial automation. The future remains uncertain.
Visionary investors who purchased Aeva shares a year ago have already multiplied their investments tenfold. They may consider themselves winners, regardless of whether Aeva transitions into a profitable enterprise or possesses an earnings trajectory that justifies its elevated stock price. They must, however, be cautious to sell before prices inevitably retract.
Over the past year, many tech investors have employed a “buy now, ask questions later” strategy, believing that “this new tech will change everything, so it doesn’t matter if the business is losing money.” Remarkably, this approach has proven effective—thus far.
Nevertheless, history tells us that such hype-driven rallies often culminate in sharp declines. Currently, prices seem to be propelled by a mix of genuine innovation and a prevalent ‘fear of missing out.’
Compounding this mystery is the significant distortion in the overall stock market…
Retirement Investors are Getting Ripped Off
Despite a recent minor selloff, the stock market, as reflected by the S&P 500, maintains extreme valuations. The Cyclically Adjusted Price-to-Earnings (CAPE) ratio—an average of the S&P 500’s price to its inflation-adjusted earnings over the last ten years—currently stands at 38.15.
Historically, the average CAPE ratio since 1881 is 17.26, indicating that the S&P 500 is now more than twice its historical price. This paints a concerning picture for retirement investors who are regularly funneling their income into S&P 500 Index funds.
The CAPE ratio is not the only concerning indicator; the Buffett Indicator—popularized by Warren Buffett himself—also raises red flags.
Essentially, the Buffett Indicator measures the total market capitalization of publicly traded stocks relative to a country’s Gross Domestic Product (GDP). It serves as a quick benchmark comparing the stock market’s dimensions with the economy’s output.
Buffett has referred to this as “probably the best single measure of where valuations stand at any given moment.” Generally, a lower ratio (around 70-80%) suggests undervaluation and a good buying opportunity, while soaring ratios signal overvaluation, as was evident during the dot-com bubble.
Currently, the U.S. Buffett Indicator is over 209 percent, setting a new record and confirming significant overvaluation.
But what if traditional valuation measures no longer hold relevance?
How Passive Investing Is Inflating a Dangerous Bubble
What if conventional stock market valuation metrics like the CAPE ratio or the Buffett Indicator are no longer accurate indicators?
Some analysts believe this shift is partly driven by retirement investors. This observation suggests that the combination of 401(k) plans and the increasing popularity of passive S&P 500 Index funds is fueling an unstoppable rise in stock prices.
Consider the mechanics: every two weeks, millions of Americans see a portion of their paycheck automatically directed into their 401(k) accounts. The most commonly chosen investment, often the default option, is usually an S&P 500 Index fund.
S&P 500 Index funds are not designed for selecting individual winners or losers based on financial health or market potential; instead, they passively replicate the performance of the S&P 500 Index.
Moreover, the S&P 500 is weighted by market capitalization, meaning larger companies command a greater share. As these companies grow, more of their stocks must be purchased by these index funds, driving their prices even higher. This phenomenon has certainly contributed to the dramatic price increases of “magnificent seven” stocks like Apple, Microsoft, Amazon, and Nvidia.
The routine inflow of 401(k) contributions into S&P 500 Index funds creates a continual demand for the largest companies, exacerbating upward pressure on stock prices. This can lead to a self-perpetuating cycle.
Essentially, this method of passive investing fosters what could be termed ‘valuation indifference,’ which raises doubts about the significance of traditional valuation metrics.
While acknowledging this trend, we at Economic Prism caution against the notion that valuation metrics have lost their importance. Rather, we believe they serve as crucial indicators that warn of the severe dangers lurking in the current market bubble.
Ultimately, all bubbles will burst. Stock market valuations will revert to economic fundamentals.
This is a fundamental truth that is being tragically overlooked.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If uncovering how this little-known chapter of American history can lead to wealth interests you, I encourage you to get a copy. It will cost you less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
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