Investors ding Tesla after disappointing results—not even its bitcoin stake can save it

Good morning.

Stocks are flat across the board, but there are plenty of green shoots. Europe’s energy, and travel and leisure stocks are gaining, helped by knockout results from BP. Later up today, we have Microsoft and Alphabet’s Google earnings.

Elsewhere, commodities, crypto and the dollar are up. On the bad news front, investors are punishing Tesla shares in the pre-market after the EV maker reported results that failed to wow the masses. More on that below.

In today’s essay, we focus on the puzzler: everything’s awesome; is all that awesomeness already priced into stocks?

But first, let’s see what’s moving markets.

Markets update

Asia

• The major Asia indexes are mixed in afternoon trading with the Shanghai Composite the best of the bunch, up less than 0.1%.
• India recorded 323,144 new COVID-19 cases in the past 24 hours as much needed international aid pours in from the U.S., Germany and the U.K. Part of the help will be a promise from the Biden Administration to ship millions of its AstraZeneca doses to the stricken country, but not for another few weeks.
• Copper bulls—heck, any metal bulls—you’ll like this little data point: King copper soared to its highest price in almost a decade on resurgent global demand… Something tells me my friends in Kolwezi, in the copper belt of DR Congo, aren’t seeing much more money in their pockets.

Europe

• The European bourses were as flat as a dish of Dover sole out of the gates, with the Stoxx Europe 600 unchanged 30 minutes into the session. (Help!, I’m running out of quintessentially flat European things for this space.)
• Shares in UBS were down 2.8% in the opening minutes of trading. The Swiss lender reported a surprise $774 million hit tied to the collapse of Archegos Capital Management.
• What a difference a year makes. Energy giant BP will resume share buybacks as its turnaround plan kicks into high gear. Investors sent shares higher, up 2.9%, lifting the energy sector with it.

U.S.

• U.S. futures are in the green this morning. That’s after tech stocks lifted the Nasdaq and S&P 500 on Monday.
• Investors were unimpressed with Tesla results yesterday, pushing the EV stock down 3% in pre-market trading. As my colleague Shawn Tully and I have pointed out many times, Tesla is making little to no money selling cars. It’s very profitable at selling pollution permits, a revenue stream that’s going up in smoke.
• The Apple share price has been on a steady march for the past month, up nearly 11% since late March. Yesterday it ticked higher yet again on news the iPhone maker is spending $430 billion—yes, billion with a B—in the U.S. over the next five years, and expanding its workforce by 20,000.

Elsewhere

• Gold is flat, trading around $1,780/ounce.
• The dollar is up.
• Crude is up a touch with Brent trading above $65/barrel.
• Bitcoin is holding on to yesterday’s gains, trading above $54,000.

***

Peak optimism

Here, in Rome, restaurants and bars reopened to outside dining and cocktails al fresco yesterday, a much needed jolt for a country that’s been cooped up for far too long. It was good to see Romans meeting with friends, having a laugh in public again.

Stock market watchers, too, are in a cheery mood. Just about everything looks good these days. Corporate results are booming, as is the labor market data. Consumer and business sentiment figures trend higher, as do economic growth forecasts.

If Wall Street had a happiness quotient, it would be measured in P/E, the price-to-earnings ratio. Over the past 40 years, stocks cumulatively have traded at a price equal to about 17 times earnings.

And today? According to FactSet, P/E stands currently at 22X, a number that continues to climb even as company after company continues to do its part, outperforming on the E side, or bottom line. Happiness, to paraphrase John Lennon and Paul McCartney, is a hot stock market.

That’s what the bulls would say, anyhow. The glass-half-empty crowd, on the other hand, might fret that those valuations look pricey. At a P/E of 22, stocks are trading at a nearly 30% premium to the 40-year average.

Looking at those numbers above, we should probably be asking: is all the good news already priced in to stocks? Jeff Buchbinder, Equity Strategist for LPL Financial, calls this puzzler the “peak optimism” conundrum. Is it possible P/E can continue to climb ever higher?

Buchbinder, for one, believes valuations are still “quite reasonable”—that is, if you factor in that we live in an era of rock-bottom interest rates. Markets run hotter when rates are low. No surprise there. Therefore, the logic goes, it’s no surprise stocks are running at record levels of P/E frothiness with historically low interest rates.

So, light a cigar. Order another round. These are good times!

Alas, Buchbinder points to some storm clouds, starting with inflation. Higher prices have the effect of putting the pinch on P/E—but only if those higher prices endure over a lengthy period.

With that in mind, here’s what he advises investors look out for if they’re not sold on P/E as the defining metric of these markets:

Cash flow: it “matters more than earnings,” he says, as it’s a truer measure of a company’s operating health.

Operational efficiency: as measured in “return on invested capital.” This data point is increasingly important as companies morph into hybrid structures where staff is spread out across multiple locations. Are they losing or gaining productivity efficiency in the process?

Tax rates: if taxes go up next year, that could be yet another factor that squeezes P/E.

In conclusion, Buchbinder writes, “stock valuations are elevated right now, and a lot of good news is priced in. However, we believe valuations are quite reasonable when considering interest rates are low and we expect inflation to remain largely contained. Investors are appropriately optimistic in our view, given the backdrop of a dramatically improving economy, the rapid pace of vaccinations in the U.S. that is facilitating the reopening, massive levels of fiscal and monetary stimulus, and surging earnings.”

***

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

Today's reads

Bitcoin on the bottom line. Tesla posted yesterday a $101 million bump in Q1 income after it sold 10% of its bitcoin stake. Elon Musk declared on Twitter the sale proved the "liquidity" of the cryptocurrency. What he didn't mention: the sale helped Tesla pad its very narrow profit.

Outperformers. The highly regarded investment strategist firm, Research Affiliates, has published a new list of its top investment bets for the decade—a grouping it believes will outperform the S&P 500 in that period. Here's the list.

Goat, or G.O.A.T? GameStop CEO George Sherman will be out the door by mid-summer. When he took over in April 2019, the share price stood at $8.94. Yesterday, GME closed at $168.93, a near 20-fold increase. Investors should be really happy with that kind stock performance. Right? Well, on the operational side, the company is still a mess. The always-great Matt Levine at Bloomberg gets into the legacy of Sherman, and digs into his pay package to try to answer: is he worth every penny of his compensation?

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