The Big Tech bounceback masks big risks
It’s that time of year again: this week saw Apple, Amazon, Google and Facebook report earnings and, with the exception of Google, the market response has been positive. Shares remained steady, and in the case of Facebook and Amazon rose significantly. Only Google parent company Alphabet saw a noteworthy slip, and, in any case, its share price had already risen by over 50% in the past year.
Shares in Meta Platforms, parent of Facebook and Instagram, hit a record high in pre-market trading today and the company has announced it will join Apple and Microsoft in paying a quarterly dividend to shareholders, something usually seen as a sign of a company reaching a point of maturity where it has fewer opportunities to invest internally for growth. Amazon, too, saw a 7% spike before markets open following news that, following a year of mass layoffs, its core profits had risen by 383%.
As an aside, it was interesting to read that a study conducted by the University of Pittsburgh found frogmarching workers back to the office made no contribution to profits.
Like staff, that is neither here nor there for the moment, though. What is relevant is that the tech sector, or at least its giants, seems to have put the dog days behind it, buoyed by a wave of hype and excitement about artificial intelligence (AI).
Good news for shareholders, then, but concentration of capital in just a handful of giant businesses is certainly something that the rest of us should take note of before popping the champagne, or sparkling perry, corks.
Indeed, the so-called ‘Magnificent Seven’ – the latest stupid moniker for a random collection of rising stocks, comprised of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla and replacing the previous term FAANG – are doing much of the heavy lifting that has seen stock indices recover from their disastrous decline in 2022.
The continued success of these businesses, along with a few other successful performers such as Broadcom and IBM, whose shares are also up significantly, should not be mistaken for a return to the pre-Covid era, though. Some things really have changed.
The passing into history of the era of 0% interest rates has at least cleaned things up a bit, with unprofitable tech start-ups now seen for what they are – unprofitable – rather than being used to mop up the excess investment cash that was sloshing around the markets in search of a return.
Perhaps more worrying is the increased concentration of both power and capital in a few gigantic businesses.
Major stock indices such as the Nasdaq 100 and, more importantly, the Standard & Poor’s 500 (S&P 500) are now heavily weighted in just a few companies operating in a single sector of the economy. This matters because these indices, which are supposed to more or less replicate the wider economy, are used to select the funds held inside pensions and other quotidian investments held by no-marks like you and I.
This matters because small-time investors without the time or expertise to pick winners have tended to benefit from buying the entire market, winners and losers alike, with the winners pushing their overall results into positive territory. To give an idea of the scale of all of this aggregated penny ante investing, Standard & Poor’s estimates that nearly $13 trillion (€11.95 trillion) is directly or indirectly indexed to the S&P 500.
Being at least half-wise, I have no predictions to make about the future. Nevertheless, it is at least noteworthy that when we say ‘the stock market is up’ what we really mean is that a small group of tech companies are raking in superprofits. If that isn’t a risk then I don’t know what is.
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