The history of companies with Nvidia-like valuations isn’t a good one

Jeremy Schwartz, global chief investment officer at WisdomTree, decided to take a look at Nvidia
NVDA,
+4.33%,
whose stock has rocketed 196% this year on demand for chips that can process artificial-intelligence-related requests. On a price-to-projected sales ratio, Nvidia stands at a lofty 25, and an even steeper 40 when looking at the trailing 12 months, he says.

Nvidia now holds the distinction of having the highest price-to-sales ratio in the S&P 500, a title 99 companies have had since the 1960s. Tech stocks perhaps not surprisingly represent 27% of that group.

Over the next year, the average price-to-sales champion has seen its stock rise 12% on average, outperforming the broader market’s 11% rise; but over the next three years, the average stock has dropped 4% annually, compared to the market’s 9% rise, and over the next five years, it has fallen 2%, versus the market’s 10% gain. Those figures are taken from a book written by famed investment author Jeremy Siegel with Schwartz’s help.

The underperformance is even starker for the tech companies that hold the biggest price-to-sales ratios. And the median performance for stocks at these price-to-sales ratios is even worse.

“Our analysis suggests that an overemphasis on high P/S stocks may falter in the long run, as it may prove difficult for these companies to sustain the rapid growth required to justify these valuations and continue their performance trajectory,” says Schwartz.

The markets

U.S. stock futures
ES00,
+0.13%

NQ00,
+0.67%
were pointing higher after the S&P 500
SPX
shed 2.1% last week. But bonds struggled: the yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 7 basis points to 4.302%.

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The buzz

China reduced its one-year loan prime rate by 10 basis points — less than the 15 basis point move expected in markets — and didn’t change its five-year rate at all. UBS separately joined the growing ranks of banks downgrading their assessment of China’s economy.

Zoom Video Communications
ZM,
+1.39%
reports results after the closing bell. Palo Alto Networks
PANW,
+16.99%
stock jumped on reporting better earnings and billings than analysts anticipated.

Meta Platforms
META,
+1.13%
this week may launch a web version of its Threads app, the social-media network meant to compete with Elon Musk’s X, according to the Wall Street Journal.

Best of the web

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WeWork
WE,
-7.64%
: What went wrong for the much-hyped firm?

Malaysia’s Prime Minister Anwar Ibrahim has threatened to sue Goldman Sachs
GS,
-1.04%,
arguing the $3.9 billion the bank paid the country over the 1MDB scandal was not enough.

Top tickers

Here are the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

The chart

It’s been a dismal August for stocks, with a 5% slump for the S&P 500 after a 21% rise for the first seven months. But there is some good news. Big institutional investors still have allocations to stocks below historical averages. According to Goldman Sachs, the net leverage of hedge funds is below the average level of the last five years. Mutual funds meanwhile have cash allocations 50 basis points above their all-time low, of 1.5%, in Dec. 2021.

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The American Airlines passenger of the famed lizard rant has taken to Instagram, where she unironically talks of promoting mental wellness.

The president of Spain’s soccer federation was in hot water after giving a kiss on the lips to a player from the World Cup-winning women’s team.

The world’s most expensive new car, courtesy of BMW unit Rolls-Royce.

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