Compared to NVIDIA, Costco and Walmart are the ones that are "ridiculously expensive."

The valuations of American retail giants Walmart and Costco have surpassed Nvidia, and investors' blind trust in these "safe stocks" may be brewing a dangerous market correction.

On August 27, Bloomberg financial commentator Jonathan Levin published an article pointing out that while the market's attention is focused on Nvidia's high stock price, a more insidious, and perhaps more dangerous, valuation bubble may be occurring with Costco and Walmart, two retail giants viewed as "absolutely safe."

The author notes that Walmart and Costco's forward price-to-earnings ratios have reached 34.3 times and 47 times, respectively, both higher than Nvidia's 34 times. The high stock prices of these two companies are not solely due to their business growth prospects but are more a result of a "safety paradox."

The article points out that investors generally view them as all-weather safe havens, stable regardless of economic conditions, and this belief has pushed their stock prices to unreasonable heights. However, the author emphasizes that history repeatedly proves that when an asset is labeled "foolproof" by the market, it often becomes the center of the next storm.

The author warns that just as the Hindenburg airship maintained an almost perfect flight record before its crash, the most painful sell-offs in the market often occur in areas mistakenly believed to be absolutely safe.

Valuation Levels Far Exceed Reasonable Ranges

The article cites data indicating that Walmart and Costco's forward price-to-earnings ratios are as high as 34.3 times and 47 times, while Nvidia's price-to-earnings ratio during the same period is "only" 34 times.

More importantly, this high valuation has significantly deviated from their historical levels.

The author emphasizes that Walmart's current price-to-earnings ratio is about 3.3 standard deviations higher than its average over the past decade (2015-2024), while Costco is about 1.7 standard deviations higher.

In simpler terms, the stock prices of these two companies have entered the statistically "extremely expensive" range.

The author expresses concern that the earnings yield of these two grounded retail stocks is far lower than the yield on two-year U.S. Treasury bonds, which is highly unusual.

The excellent performance of the two companies is indeed supported by fundamentals. In an environment where consumers are tightening their belts, they are capturing a larger share of ordinary households' wallets and even expanding their influence among high-income groups. Walmart is transforming into an e-commerce company, further enhancing growth expectations.

However, the article points out that as mature companies with large business footprints, their addressable market size is limited by consumer demand, and their growth prospects cannot fully explain the current valuation levels.

The "Halo" of All-Weather Stocks and Reality

The author believes that it is primarily the "perception of safety" that has driven up these retailers' valuations. Investors believe these stocks "cannot go down," and this very notion increases the risk of correction.

Costco and Walmart are viewed as "all-weather stocks." Their reputation for good value means they profit during economic booms and capture market share during downturns During the period from 2020 to 2024, despite experiencing the pandemic, the most severe inflation in 40 years, and aggressive interest rate hikes, the two companies remain among the only 48 in the S&P 500 that have never seen a year-over-year decline in revenue or earnings per share.

In terms of market performance, since the end of 2019, Costco's return has reached 250%, while Walmart's is 163%, both exceeding the S&P 500's 118%.

Even more impressively, they achieved high returns with extremely low volatility, with risk-adjusted returns ranking in the top ten of the S&P 500.

The author pointedly notes:

The reason these stocks have soared is that investors believe they cannot go down! Ironically, this very belief exposes them to a higher risk of correction.

Historical Warnings: When "Foolproof" Is No Longer Safe

The author subsequently cites several historical cases to support his point.

He mentions the U.S. Treasury market in 2021, when investors, after decades of low interest rates, generally believed inflation was dead, only to face a sudden surge in inflation and interest rate hikes, leading to a sharp drop in bond prices and ultimately triggering a banking crisis.

Similarly, before the 2007 financial crisis, many firmly believed that housing prices would never fall, a belief that pushed prices to unsustainable heights, ultimately resulting in a catastrophic collapse.

These historical events point to a common pattern: the so-called "safety paradox" is ubiquitous in financial markets. When the safety of an asset becomes a consensus, risk often accumulates quietly.

For Walmart and Costco, the author believes we are at a similar crossroads.

The recent macroeconomic environment—high interest rates and stubborn inflation—has made consumers budget-conscious, yet the economy has not deteriorated to the point of mass unemployment, creating a perfect "sweet spot" for these two companies.

However, the author emphasizes that this is a "unique and unstable balance that will not last forever."

Future Risks and Market Irrationality

The article emphasizes that a full-blown economic recession is not even necessary. A mere slight slowdown in economic growth could be enough for investors to realize that "demand cannot grow indefinitely," prompting them to reassess those outrageous valuations.

If the price-to-earnings ratios of these two companies revert to the average levels of the past decade, with earnings expectations unchanged, Walmart's stock price could face a 39% decline, while Costco could drop by 28%.

Of course, the author also acknowledges that "safety" itself can become a self-fulfilling prophecy for a considerable period.

If the public believes something is a guaranteed profit, more and more people will buy in, driving prices up, which in turn seems to confirm the initial judgment. For Walmart and Costco, this "safety tune" has been playing for several years.

The article concludes by stating that it is not predicting a crisis but rather reminding investors of the importance of maintaining clarity and vigilance when everyone is running in the same direction