You have to go back to the Great Depression of the early 1930s to see again how a few eat so much cake. On Wall Street, 10% of the shares on the US stock market alone already represent 75% of the entire stock market, according to a recent estimate by Deutsche Bank.
Inequality, present in many areas of the modern economy, has reached the markets. The seven main ones (the magnificent sisters, as they are called Apple, Meta, Alphabet, Microsoft, Amazon, Nvidia and Tesla) already represent with their capitalization more than a third of the entire S index
The total market capitalization of technology companies exceeds the GDP generated in a year by a city like New York, Tokyo or San Francisco. So if they move upward, as is happening now, they drag down all the others. In fact, they alone fueled half of all early-year gains on Wall Street. And its expansion wave extends beyond the Atlantic, with the European and Japanese stock markets at highs.
In this context it is difficult to diversify portfolios. If we also consider that the richest 10% of Americans own more than 93% of the shares, then a mere decision to sell by a small number of people could potentially trigger panic.
“This evolution could lead to greater volatility and, therefore, greater risks for investors, because the diversification of the index decreases and there is much more exposure to the performance of the individual company,” analyzes Francesco Franzoni, professor of Finance at the University of Italian Switzerland in Lugano.
“What if one of the so-called magnificent seven did not live up to expectations in terms of future growth? In my opinion, it increases the risk of the index falling,” says this academic. He's not the only one setting off alarm bells. The Swiss bank UBS even predicts that one of the seven sisters could suffer a significant decline in 2024. “Extremely concentrated markets represent a risk. Just as a very limited number of stocks have so far been responsible for most of the gains, their corrections could drag the stock markets down with them,” wrote JP Morgan analysts, led by Khuram Chaudhry.
Another imbalance: while big stocks are celebrating as if we were in a new bull market, small stocks are being ignored. The Russell 2000, an index that tracks small-cap stocks, is down 27% from its most recent peak. Meanwhile, the S
And they cite the following cases. In 2007, for example, the 10 largest companies were responsible for 78% of Wall Street's profits but the stock market plummeted 37% in 2008 with the great financial crisis. In 1999, 54% of the SP500 index's return came from the top 10 companies, but it fell 9% in 2000 when the dot-com bubble burst.
Josep Ramon Aixelà, manager, disseminator and teacher at the Institute of Financial Studies (IEF), explains that in these circumstances of high concentration "any accident or unforeseen event can amplify the losses of the group." In this sense, he gives as an example a possible regulatory intervention to limit the oligopolistic power of these companies. Or any irregularity that may appear in the accounts of one of them.
“Stock markets are at historic highs with interest rates that have become more expensive. This goes against classical economic theory. The truth is that financial markets are taking over the real economy. It's not just a Wall Street thing: the German DAX is at all-time highs when the German economy is on the rocks. This distortion is explained by the enormous weight that derivative markets have, the policy of repurchasing shares of companies to support the stock market title and by a certain fear of investors of missing out on something and the pressure to enter companies that are now in business. fashion. It is like the tail that the dog moves and not the other way around,” he warns. In fact, just a few days ago Warren Buffett, the legendary Wall Street investor, said that today the stock market is much more like a casino than when he started, almost six decades ago.
Many traders are wondering if the spectacular rise of recent weeks is sustainable. Since the Fed began raising rates in March 2022, the US stock market has gained 17%. How is it possible? At the outset, we must remember that the level of current interest rates is nothing out of this world. “We come from a totally anomalous decade, in which money had no price, with negative rates. The recent rise is still a historical normalization. There is a generation that no longer knows what this is, but we will have to get used to the fact that there will be a little inflation and that credit will have a cost. And those of us who invest in fixed income will have to choose investment options again,” commented Pierre Verlé, co-director of fixed income at the Carmignac management company, during a recent visit to Barcelona.
Well, if we are going towards a normal situation, there are those who think that this stock market rise, driven largely by a single sector, is also normal. And there remains potential for more revaluations. “This concentration is not coincidental, it is a reflection of where the economy is going, an increasingly robotic and algorithmized model,” says Víctor Alvargonzález, founding partner of the financial advisory firm Nextep Finance. “There is a lot of talk about a technology bubble, but in general the valuations are reasonable. I'll give you a piece of information: Alphabet shares have risen 164% in the last five years and its profits have risen 160%,” says Alvargonzález.
Furthermore, he adds, other world stock markets are at historic highs even though they do not have a high weight of technology in their indices, as is the case with the Eurostoxx. Therefore, this stock market rise seems to have bases that go beyond the sectoral concentration that reigns on Wall Street. “The only thing that happens – he clarifies – is that there may be some volatility. Because those who get on the car now tend to be the first to get off it later.” Never have investors owed so much to so few.
