The very large market capitalisation of some United States stocks, particularly those in the technology and communication sectors, is skewing the shape of that market, which is not sustainable or beneficial for other sectors, according to a portfolio manager with a global investment firm.
Schroders head of Australian equities Martin Conlon said the dominance of the US market and the ‘Magnificent 7’ stocks on the S&P 500 – Nvidia, Microsoft, Apple, Amazon, Alphabet, Tesla and Meta – should not be viewed as a long-term certainty.
“The US market is the epicentre of what’s going on in the world at the moment and the alarming number is that the US is now 70 per cent of the market capitalisation of the world, and within that sort of 30 to 40 per cent is in technology and communications, but the US is only about 18 per cent of global gross domestic product,” Conlon said during a recent briefing for financial advisers.
“When I stand back and ask what are the long-run assumptions, the big one is that the profit growth of those big technology companies is going to keep on growing and it’s going to be durable forever, but when the companies underlying positions are, for the most part, global monopolies, that can be can be a sign of complacency.”
He said the scale of the Magnificent 7 would in time start to hamper their growth, noting Apple was recently fined $3 billion by the European Union for anti-competitive behaviour.
“What people miss is the law of large numbers and that when you get really big, outperforming the global economy just gets tougher and tougher,” he said.
“These mega powerful monopoly businesses, their profits go up because they put their price up. Those earnings are being sucked out of every other company around the world and they are sucking the life out of the rest of the economy.
“This is why extrapolating outcomes, even where there is 25 to 30 times earnings, with expectations from those incredibly large bases that they can keep on growing are just unrealistic in the longer run.
“History tells you those sort of things are where people get overexcited and it’s also where you get tons of short-term speculative gains. Everyone’s got stories of how they got rich and that sort of stuff is fairly symptomatic of bubble-like conditions.”
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