The Unnerving Focus of US Big Tech Stocks: A Cautionary Tale for Investors
A Defiant Take by Alex Wehnert
Seven historic investors make their comeback, sparking a surge in the financial sphere.
Investors should exhibit caution due to the significant interdependencies within the Big-Tech sector, but current concerns remain meager. The astounding fact that seven companies represent a third of the market capitalization of the S&P 500 might not be novel information for investors. However, the implications for performance and the potential consequences for the overall market are not to be underestimated. This year, the US benchmark has skyrocketed nearly 25%, while the S&P 500 Equal Weight, which allocates equal weight to all members at 0.2%, has increased a more conservative 10%. A mere thought of the repercussions that Wall Street could face if the Big-Tech sector's bull run were to decelerate doesn't require much imagination. However, large asset managers like Blackrock and Amundi are contributing to the concentration risks by launching new, highly focused US Mega-Cap ETFs, acting almost recklessly.
The Big-Tech sector's focus is at an all-time high in decades. In the '50s, energy and commodity companies constituted close to 40% of the US leading index, akin to the IT industry's current weighting. This fact should alarm investors further, as within the Big-Tech ensemble, mutual dependencies are even stronger than in many other industries. This coherence is evident in the hype surrounding artificial intelligence, fueling the stock rally.
Nvidia's semiconductors are considered the driving force behind the boom, but the chip developer is also heavily dependent on its major clients. According to Omdia, Microsoft ordered 485,000 "Hopper" series graphics processors this year, dwarfing the next-largest customer, Meta Platforms. Sales figures beyond the Big-Tech bubble are insignificant in comparison. If one of the big clients were to withdraw, Nvidia’s lauded revenue growth would take a substantial hit.
Many fund managers might still dismiss these risks, claiming they actively manage their portfolios but, in reality, closely track the S&P 500 or even the Nasdaq 100. After all, tech giants have substantial cash balances invested. J.P. Morgan predicts that the Magnificent Seven will increase their investment expenditures to a collective $500 billion by 2025. However, this scattershot strategy does not guarantee higher returns for shareholders—historically, frugal companies have outperformed in the long run. The viability of these capital investments is also questionable.
Nvidia's latest quarterly results from November hint that AI's hopes might reach their limit. The successors to the "Hopper" chips in the new "Blackwell" series are incredibly complex. A single faulty component can render a $40,000 processor ineffective, significantly impeding production yields. If tech giants must increasingly write off portions of their chip investments, economic reality will eventually force them to adopt more prudent spending habits. If Nvidia can't deliver on its promised performance in the near future, other business areas of Big Tech, including advertising and e-commerce, become more scrutinized, as these revenue streams have exhibited volatility recently.
The "Magnificent Seven" analogy may fit differently than originally intended. When the star, Yul Brynner, left the series, the remaining installments were panned. The first film of the quartet without Brynner is called "The Magnificent Seven Ride Again" in German—a fate that may soon befall overly optimistic investors.
Insights from Enrichment:
- Potential Risks: Concentration risk, market vulnerability, overvaluation, and mispricing are the risks inherent in the highly concentrated Big-Tech sector.
- End of Bull Run Consequences: A reversal in Big-Tech's bull run could trigger broader market declines, rotate capital into other sectors, increase volatility, and have ripple effects on the broader economy.
The dependence on technology within the Big-Tech sector, as demonstrated by the significant investments in Nvidia's semiconductors, could pose substantial risks for investors, particularly if these tech giants face challenges in delivering promised performance, such as with the new "Blackwell" series. In light of the heavy concentration of the S&P 500 in a few technology stocks, it is crucial for investors to exercise caution and consider diversifying their portfolios beyond investing solely in technology.
