The most successful companies in the United States have reached an all-time high market capitalization of $14.8 trillion as of January 25, 2024, representing a 15-fold increase since 2011.
It's almost unbelievable that the market capitalization surged by $6.7 trillion, representing an astonishing 82% growth. This stands as one of the most significant leaps in the history of the US market in absolute terms and can be likened to the market's performance in both 2009 and 1999 when viewed in relative terms.
Factors Behind the Surge
Is there a fundamental justification for such a rapid increase? Based on objective analysis, financial indicators are at historic highs when compared on a similar basis, although the growth rate has significantly slowed down from 2021 to 2022.
The primary driver of this growth is the technology revolution, with companies like Microsoft, OpenAI, and Google leading the way and influencing the entire industry. There is reason to believe that this technological transformation is one of the most significant implementations of the 21st century in terms of scale and its impact on various sectors.
While financials appear strong, there is a question about how disconnected the market might be from reality. I have considered the market capitalization as of January 25, 2024, along with the sum of financial figures for the 12 months up to and including the third quarter of 2023.
Analyzing Financial Indicators
The Price-to-Sales (P/S) ratio, which measures capitalization to revenue, stands at 7.7. This is comparable to the all-time high of 7.8 in the fourth quarter of 2021 and represents a 53% increase compared to the period from 2017 to 2019, with a 107% deviation relative to the period from 2012 to 2016.
The Price-to-Operating-Income (P/OI) ratio is 36, which is close to the historical high observed in 2020 and 2021. Compared to the period from 2017 to 2019, the current estimate is 50% higher, and it's 120% higher than the period from 2012 to 2016.
The Price-to-Operating-Cash-Flow (P/OCF) ratio is 27.2, which is also close to the high seen in 2021. In comparison to the period from 2017 to 2019, there is a 54% deviation, and compared to the period from 2012 to 2016, there is a 117% deviation.
The Price-to-Free-Cash-Flow (P/FCF) ratio is 41.5 and again matches the historical high from 2021. However, there is a notable divergence from the period between 2017 and 2019, with a 60% difference, and it's more than 125% higher than the period from 2012 to 2016.
Conclusion
In conclusion, successful companies are currently valued at 2 to 2.3 times higher than in the period from 2012 to 2016, 1.5 to 1.6 times higher than in the period from 2017 to 2019, and three times higher than in 2011.