Big Tech marches on. Last week the S&P 500 index on Wall Street hit yet another all-time record, and Nvidia again topped $5 trillion (£3.7 trillion) in market value, having first passed that milestone in October.
That’s more than all the companies on the London Stock Exchange put together.
Great for UK investors who have bought into the artificial intelligence (AI) dream, but it does rather put us in our place.
What our government does matters a lot to us because we have to pay higher taxes, and what our companies do matters because they employ a lot of people.
But from a global financial perspective the story is 5,500 miles away on America’s west coast in California’s Silicon Valley.
So where next? The shorthand of the Magnificent Seven – Alphabet (owner of Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla – is a neat encapsulation of the most prominent of the tech giants, but actually they are very different in their histories, goods and services they provide, and maybe their future prospects.
So where next?: The shorthand of the Magnificent Seven is a neat encapsulation of the most prominent of the tech giants
What they have in common is that the fate of all is likely to be transformed by the AI revolution. For investors, it’s a thrilling ride… and a scary one.
I don’t think it is helpful to try to second-guess the market about the relative prospects of each of the seven. I find it bewildering that Tesla, a relatively small car manufacturer facing a huge challenge from China, should be worth $1.2 trillion (£880 billion).
But for loyal investors, it’s Elon Musk’s genius they are buying. It’s the bet that with Tesla’s autopilot and full self-driving, he will transform road transport in the way that he pioneered the switch from the internal combustion engine to full electrics.
As for the others, well, most of us are prisoners of their services, be it Amazon delivering stuff to our door or using Google.
We should, however, think about the likely duration of this bull market. It is driven by optimism about the ways AI will transform the global economy and in doing so bring riches to its pioneers.
But, as we saw with the dotcom boom that peaked in 2000, a technology can change everything, yet catch investors unawares.
Sir John Templeton, the legendary investor and philanthropist who died in 2008, observed: ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.’
The way in which the Magnificent Seven boom has ignored the war in the Middle East, the surge in inflation and the growing indebtedness of governments, suggests we are somewhere on his sequence between optimism and euphoria. It feels as if we are in a late-stage bull market. But since, historically, this is the point at which some of the best returns accrue, investors should not rush for the door too soon.
Let’s state a wealth warning. It is impossible to time huge market movements. All we can do is acknowledge there is a cycle and try to make a rough guess as to where we are on it, accepting we may be wrong.
With that in mind I find some comments by Chris Watling, at the London consultants Longview Economics, helpful. His worry list starts with over-ownership of US equities. Not only do US retail investors hold a record proportion of their assets in US equities, foreign investors do so too.
Next, there is evidence of a high level of speculation, as smaller investors are pulled in by the high returns already achieved.
Third, current valuations are at the top end of historical measures, with the forward price/earnings ratio for the S&P 500 at 22, underpinned by record profit margins. But in the long-term margins will revert to norm.
So, lots of concerns. But there has to be something that will trigger the bear market, and he notes that the usual elements that end the boom are not there.
Credit is still loose, profits are rising, US consumption is climbing, and there doesn’t seem to be a recession around the corner.
His judgement: ‘None of those helpful market timing tools are suggesting that this bull market is about to end.’
These are uncertain times, but he is probably right.
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