The world runs on technology, and right now, the capital markets are no different.
Such is the power of America’s Magnificent Seven, namely Google parent Alphabet Inc (NASDAQ:GOOG), Amazon.com Inc (NASDAQ:AMZN, ETR:AMZ), Apple Inc (NASDAQ:AAPL, ETR:APC), Meta Platforms Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), Nvidia Corporation (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA), that the S&P 500 index just hit another all-time high, thanks to runaway valuations of these globally influential megacorporations.
While this is impressive, Big Tech’s insatiable appetite for share price appreciation has also created a misrepresentation of the broader health of the global equity markets.
According to Schroder’s Equity Lens December report, the M7 rallied 68% on average throughout 2023, while the rest of the world average was just 10%.
Another stat to chew on: The M7 comprise more of the MSCI World Index than Japan, the UK, China, France and Canada combined.
On a weighted basis, the M7 make up 28% of the S&P 500. Or probably more, considering the data represented a mid-December 2023 snapshot.
For the M7 have continued to rally well into 2023, with Microsoft edging above $3 trillion for the first time ever, Nvidia heading over $1.5 trillion for the first time ever, Alphabet hitting a new all-time high… you get the point.
Only Tesla has underperformed in the new year, thanks to a series of worrying price cuts and a lack of adults in the room, as Wedbush put it.
Nonetheless, Elon Musk’s electric vehicle (EV) megacap managed to double in value throughout 2023, so it was starting from a very lofty position.
Big Tech: A bubble ready to burst?
Given this immense concentration of investor capital into a handful of megacaps, the global equity story would be vastly different without the star power they are currently providing.
The barren IPO wasteland gives a strong insight into what the reality is really like for the troops on the ground.
Global IPO volumes fell 8% in 2023 compared to the already dismal 2022, while proceeds fell by a third. To make matters worse, even these rubbish numbers were skewed by just a handful of big-ticket tech listings, primarily Arm Holdings PLC (NASDAQ:ARM)’s blockbuster $54.5 billion US debut.
Small-cap fundraisings were virtually non-existent, particularly in London’s troubled Square Mile.
Passive investors holding index-linked funds are unlikely to care about this reality. All they see is their portfolio go up, without paying mind to the fundamentals underpinning these gains.
But how long can this dynamic continue?
FT columnist Gillian Tett made a sage comparison recently: The current concentration of capital in Big Tech is roughly equivalent to that of the finance sector in 2007, right before the credit bubble burst and collapsed the entire market.
Back then, investors expected the big banks to keep on banking big profits. Today, hyped-up investors see a clear path to sustained cash generation among the M7.
Their optimism is keeping the market alive, but what is this optimism founded on?
The obvious – and right – answer, is artificial intelligence (AI).
Nvidia’s remarkable outperformance, even among its M7 brethren, is the best example of what an AI premium can bring a company’s valuation.
The fabless chipmaker’s high-end designs provided the building blocks on top of which OpenAI’s groundbreaking ChatGPT large-language model was built.
Since then, Nvidia’s AI-powering chips have been in huge demand at the world’s largest data centres, setting the firm off on a blistering 240% rally in 2023 and another cheeky 29% in the first three weeks of 2024.
Meanwhile, Microsoft, the second biggest AI player in the market thanks to its 50% stake in OpenAI, enjoyed a 57% rally in 2023.
It is more than just speculation driving these rallies; they are also cash-generating machines with little to no debt on the books (though it would be a falsehood to deny that at least some of these gains are because of fevered AI hype).
Further supporting the bull thesis is the fact that this Big Tech rally has technically occurred in a cyclical downcycle.
Supporting the bull thesis further still is the fact that the downcycle may be coming to a close.
Sector lodestar Taiwan Semiconductor Manufacturing Company (TSMC) is bracing for a rebound in global wafer demand in 2024, reckon analysts, even though its fourth-quarter results were underwhelming.
An optimist would call this current Big Tech rally justified, given the seemingly unbreakable fundamentals on which it is based.
Yet scholars of history would warn that the greater the bubble, the greater the burst.