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In the short and very long terms, ignore equity market valuations. In between, watch carefully

More on valuations

Last week, when Unhedged gave its bear case for the year ahead, we carefully excluded high valuations. High stock prices tell you almost nothing about what markets will do in the short term. We used this scatter chart, which maps year-end S&P 500 valuations on to year-ahead price returns, to illustrate the point:

Several readers wrote to say valuations are a good guide to longer-term returns. They’re right. Here’s the same chart, but with 10-year returns annualised on the vertical axis. The R-squared relationship (the degree to which variation in returns can be explained by initial valuation) goes from 0.03 to a meaty 0.69.

Notice, however, the big blob of dots in the middle of the chart, where annual returns cluster around 5 per cent and 12 per cent and P/Es cluster between 15 and 20. Here, the relationship is weak. It’s only when valuations get to extremes that they tell you very much about long-term returns. Fussing about the difference between a 15 and 20 P/E market probably won’t make you much money.

This is a small sample and a simplification. Robert Shiller of Yale has laid out a much more refined version of the relationship, one which accounts both for the cyclicality of earnings and the effect of interest rates. The S&P 500 “excess Cape yield” takes an earnings/price ratio — that is, an earnings yield — using 10-year average earnings as the numerator, and then subtracts the 10-year Treasury yield from the result. So the “excess” means “in excess of the bond market”. It has been a pretty good indicator of 10-year forward equity performance over the past century, as this chart shows:

However, the most interesting part of that chart is the period since 2011 or so, when 10-year returns (the pink line) have started to break above their traditional relationship with the excess cape yield (the blue line). That breakout explains the agonies valuation-oriented investors have suffered for the past decade or more. S&P 500 valuations have waved a caution flag on and off for years, and anyone who heeded it has missed out on great returns. (As a person who got their start in value investing, I was a member of this unhappily underinvested club for several years).

Right now, the excess cape yield is almost as low as it has ever been. Should we look back at the past decade and ignore the alarming implications? Some people think so (see the One good read, below).

Let’s cut the data a slightly different way. The chart below shows 10-year S&P 500 excess returns minus the initial excess cape yield. That is, it shows you how much more or less the markets delivered than the cape yield “promised” (the red line is the average):

What does this chart say? At the risk of playing fast and loose statistically, it says average 10-year excess returns are just a shade (0.6 per cent) higher than the starting excess cape yield. And while excess returns usually don’t stray more than, say, six percentage points in either direction from that average, they do swing around quite a lot. The last 10 years have delivered much higher excess returns than the excess cape yield would have predicted but — and this is the crucial point — the divergence is not unprecedented. In March of 1999, for example, the excess cape yield was a horrifyingly low 0.21 per cent and annualised real returns over bonds over the next 10 years were worse — minus 10 per cent. But that divergence didn’t last, and our guess is that the current divergence, in the other direction, won’t last, either.

Value investors have been making points like this for a long time. But there is a related point that I hadn’t thought of until it was pointed out to me by Jay Beidler of Distillate Capital. Over the long term, valuations do tell you something about returns, but over the very long term, they tell you less and less. This is because the effects of swings in valuation cancel each other out over very long periods, and the steadier sources of return — earnings growth and dividends — come to predominate. Here, from a recent Distillate note, shows the R-squared for starting valuations and forward returns for different periods:

As another way to visualise this slightly slippery point, here is a chart from Distillate showing the sources of 10-year returns on the S&P 500, divided into real earnings, dividends and changes in valuation. Valuations mean revert; earnings and dividends compound:

There is an important lesson in that chart for investors under 40 or so: don’t worry too much about valuations. Just get started, and buy some diversified equity indices if you can. Valuations will take care of themselves over the next 30 years. And if they don’t, you’ll probably have bigger problems than your investment portfolio.

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Nuclear startup X-energy raised $700 million in a Series D found, the company told TechCrunch.

The new fundraise comes less than a year after it expanded its Series C from $500 million to $700 million, bringing the total raised in the last year or so to $1.4 billion, a sizable amount even in the heady world of nuclear power startups. X-energy has raised $1.8 billion, to date.

X-energy said the new infusion will help build the supply chain for its small modular reactors (SMR). So far, the startup says it has orders for 144 SMRs capable of generating 11 gigawatts of electricity. Customers include Amazon, Dow, and British energy company Centrica.

The new round was led by Jane Street, which joined as an investor in the expanded Series C. Other investors participating include Ares Management funds, ARK Invest, Corner Capital, Emerson Collective, Galvanize, Hood River Capital Management, NGP, Point72, Reaves Asset Management, Segra Capital Management, and XTX Ventures.

X-energy is developing high-temperature, gas-cooled reactors, a type more recently used in Japan and China. Each of its Xe-100 reactors can generate 80 megawatts of electricity, and they are fueled by billiard ball-sized, carbon-coated pebbles containing uranium particles. Inside the reactor, helium gas flows over the pebbles, collecting heat, which is transferred to a steam turbine to generate electricity.

Like other nuclear startups, X-energy has ridden a wave of interest from tech companies and data center developers.

Amazon’s Climate Pledge Fund led the first installment of the startup’s Series C. The tech company also announced last year it would buy more than 600 megawatts of nuclear capacity in the Pacific Northwest and Virginia, with the reactors coming online in the early 2030s. Altogether, Amazon’s deal with X-energy could see as much as 5 gigawatts deployed by 2039.

X-energy is in a race with several other SMR startups to resuscitate the nuclear industry in the United States. While many of the designs appear promising, only a handful SMR power plants have been built to date, none of which are in the United States.

Located at 314 Regent Street, the new store marks the New York-based company’s first flagship in the United Kingdom.

Kith is continuing its international expansion with the opening of its new London flagship store.

Located at 314 Regent Street, the new 19,000-square-foot store marks the New York-based company’s first flagship in the United Kingdom and features the complete Kith, Kith Women, and Kith Kids assortments, alongside Kith Treats, and FN’s 2025 Person of the Year Ronnie Fieg’s first independent restaurant venture – Ronnie’s.

To bring this flagship to life, Fieg collaborated with architect Ben Porto of Porto Architecture to execute his design vision to bring this flagship to life. The end result sees the combination of what was formerly 318 and 324 Regent Street into a significant, substantial hospitality destination, boasting two floors standing where Regent and Little Portland Streets meet.

There are two designated entrances for the Kith retail space and one separate entrance for Ronnie’s, the entire building’s facade being part of the original John Nash-designed Regent Street, later replaced with neo-baroque style buildings as a part of Regent Street’s rebuilding during the 1920s.

Looking closer at the space, the main entrance is defined by the original interior vestibule for the building, complete with original curved glazing and windowpane glass that’s over a century old. Maintaining its historical integrity was key throughout the process of Kith’s venture into London, and truly captures the upscale essence of the storefront from the inside out, the company noted.

On each side of the entrance is Kith Kids and Kith Treats, with the kids store featuring a lighter color palette defined by its signature cloud motif turned into the ceiling structure and Kith monogramming throughout. Defining materials are Estremoz marble, a custom fan mosaic, and satin brass accents, featuring an elevated playful spirit that encompasses the Kith Kids brand.

Kith Treats has classic bar-style seating, a muted pastel palette with the same custom fan mosaic found in Kith Kids, Rosa Portugalo, and Azul Cielo marble alongside Volakas marble counters, and stainless-steel trim and accent metal. Kith Treats London will feature all mainstay menu items, alongside signature specials exclusive to that location.

As guests walk through the entrance and past the two respective left and right destinations, they are welcomed into a much lighter space – the designated women’s area. Defined by custom white oak millwork embellished with crystal Tiffany marble, Estremoz marble lined walls, and Pentelikon marble band and inlay with an oak herringbone floor, this space is reminiscent of recent Kith Women builds in Chicago and New York City. Here, the complete assortment of Kith Women apparel and accessories live, including the latest seasonal collections and collaborations.

To the right of the women’s space and through the checkout area, guests will experience a much darker, richer palette, consisting of walnut millwork, Belvedere marble walls and Calacatta Vagli marble tables , alongside Kith embossed leatherwork throughout. It is complete with deep wood herringbone floors, diamond-tufted green velvet accents, and recessed lighting on the plaster molded ceilings. This is where Kith seasonal collections can be shopped, accessories alongside fine jewelry, and collaborations. Kith London-exclusive apparel and accessories will also be available at this location.

A focal point of the Kith London flagship is its grand staircase that leads to a lower level found in the women’s area, made of Calacatta Fantastico Arni marble with satin brass, boasting Kith crest artwork at the entrance.

Downstairs is home to Kith’s complete assortment of footwear and additional apparel and accessory retailers, including ready-to-wear, hype footwear drops, and select luxury vintage. The room is comprised of the same dark wood found in the Kith space alongside Belvedere marble display cases and benches, Calacatta Fantastico Arni marble band at the dark stained oak flooring, completed by a brass parque, K&K embossed velvet panels, and plush seating arrangements for guest.

As for the store’s new Ronnie’s dining experience, the menu will offer modern Mediterranean fare to classic Empire State staples, the company noted.

To celebrate the opening of its new London flagship, Kith created a special capsule of apparel and accessories, comprising tees, jerseys, pullovers, and headwear, completed by exclusive Kith London artwork as the Monday Program offering on Nov. 24.

Kith London will open its doors on Friday, Nov. 28 with this exclusive capsule, alongside additional London-only apparel, accessories, and footwear. Ronnie’s will open later this year.

The little short before the big short?

With the stock market a little jittery at the moment, Oracle CDS trading exploding and even AI insiders conceding that things have become a bit frothy, there’s growing interest in how, where and when to short things.

Luckily, Goldman Sachs’ latest report on hedge fund positioning contains a lot of interesting titbits. Alphaville’s main takeaway is that the so-called “smart money” isn’t quite yet ready to start shorting the big AI beasts, but some of them are sniffing around several of the weaker members of the herd.

First off, the median short interest in S&P 500 stocks remains surprisingly high after such a powerful rally. At the equivalent of 2.4 per cent of overall market capitalisation, shorting is at the 99th percentile relative to the past five years, and well above the long term average since 1995.

Alphaville had already flagged the resurgence of short interest back in May, but it’s interesting that the level has edged up since then and remains elevated today — despite two small but painful short squeezes in July and again in mid-October.

Tellingly, the short interest in the tech-heavy Nasdaq 100 index is a smidgen higher, at 2.5 per cent. However, the biggest rise has happened in small-caps, with the median short interest in members of the Russell 2000 currently at 5.5 per cent.

However, to us the most intriguing development is a surge in short interest in utilities.

A 0.3 percentage point increase in short interest to 3.2 per cent might not sound terribly exciting, but this is one of the highest levels ever recorded, according to Goldman Sachs.

This is presumably as a proxy to the AI bubble. After all, the immense energy-intensity of data centres needed to fuel AI models has meant that normally boring utility stocks have begun to look a little racy.

Take American Electric Power, which is up over 31 per cent this year and is now valued at $65bn. Last month the utility increased its five-year capex plan from an already hefty $54bn to $72bn, largely to supply energy to data centres being built by the likes of Alphabet, Amazon and Meta. The short interest in its shares is now 4 per cent, according to Koyfin data, up from the 1-2 per cent range it has generally stayed in over the past decade.

So are individual utility companies the most popular overall short bets in Goldman’s dataset? No, given that the outright level of short interest is still modest relative to several other sectors (they’re still utilities after all).

Tesla once again makes an appearance at the top of the list of America’s most shorted companies, with JPMorgan an interesting/weird new entry at number four. But a lot of the other new members in Goldman’s basket of heavily-shorted stocks — in bold in the list below — can be fairly classified as either weaker AI players or exceptionally frothy AI-adjacent stocks.

Sorry for the bad resolution, but here’s a zoomable version of the list. For those that can’t be bothered to squint at it, Goldman tallied $5.4bn of shorts in Oracle’s stock, another $4.6bn in Intel, and $4.1bn in GE Vernova, which makes gas turbines for AI data centres, among the list’s new entrants.

Of course, a lot of these are huge companies, so as a percentage of market cap these short positions are often still small (1 per cent, 3 per cent and 3 per cent respectively). So what are the most heavily shorted stocks relative to their size? Luckily, Goldman has us covered:

As you can hopefully see, the most heavily shorted stock in America with a market cap of at least $25bn is Bloom Energy, which FT Alphaville had already flagged as an example of markets reaching the “we’re going to be ruefully laughing at this in the future” stage of the boom. The rest of the list includes a lot of other FTAV faves, such as Strategy, CoreWeave, Coinbase, Live Nation, Robinhood, and Apollo.

It’s important to remember that Goldman’s hedge fund positioning report is only a delayed snapshot of the current state of things, albeit a pretty decent one (this report used the latest reported holdings of 982 hedge funds with $4tn of gross equity positions, of which $2.6tn is long and $1.4tn short).

It already looks like the US stock market has regained its footing from last week’s drama, and many hedge funds will be wary of shorting the AI hyperscalers given how bubbles can go on for longer than they can remain solvent. Indeed, Amazon, Microsoft, Meta, Nvidia and Alphabet are all the five most common long bets by US hedge funds tallied by Goldman.

But the uptick in short interest in utilities and a few of the weaker AI names indicates that some are beginning to dabble in and around what could be the industry’s next big short.