You have to go back to the Great Depression of the early 1930s to see how a few eat so much cake. On Wall Street, 10% of the shares of the American 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 main seven (the magnificent seven or seven sisters, as Apple, Meta, Alphabet, Microsoft, Amazon, Nvidia and Tesla are known) already represent with their capitalization more than a third of the entire S index
The total stock market capitalization of technologies exceeds the GDP generated in a year by a city such as New York, Tokyo or San Francisco. So, if they move upwards, as is happening now, they drag all the others down. In fact, they alone fueled half of all Wall Street's year-to-date gains. And its expansive wave extends beyond the Atlantic, with European and Japanese stock markets at their highest.
In this context it is difficult to carry out portfolio diversification. If we also consider that the richest 10% of Americans own more than 93% of stocks, then a simple selling decision by a small number of people could potentially trigger panic.
"This development could lead to greater volatility and therefore more 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 in Finance from 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, the risk of a fall in the index increases", says this academic. He's not the only one setting off the alarms. 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. As so far a very limited number of stocks have 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 large stocks are being celebrated as if we're in a new bull market, small stocks are being looked down upon. The Russell 2000, an index that tracks small-cap stocks, is down 27% from its most recent peak. Meanwhile, S
And they mention the following cases. In 2007, for example, the 10 largest companies were responsible for 78% of Wall Street's gains, but the stock market plunged 37% in 2008 with the Great Financial Crisis. In 1999, 54% of the performance of the S
Josep Ramon Aixelà, manager, publicist 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.
"The stock markets are at historic highs with interest rates that have become more expensive. This goes against classical economic theory. The truth is that the financial markets are burdening the real economy. It's not just a Wall Street thing: the German Dax is at record highs when the German economy is down. This distortion is explained by the enormous weight that the derivative markets have, by the share buyback policy of companies to sustain the stock market title and by a certain fear of investors to lose something and the pressure to enter the companies that now they are fashionable It's like the tail wagging the dog 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 operators are wondering if the spectacular rise of the last few weeks is sustainable. Since the Fed began raising rates in March 2022, the stock market in the US has gained 17%. How is it possible? At the outset, it must be remembered that the level of current interest rates is nothing out of the ordinary. "We come from a totally anomalous decade, when money had no price, with negative rates. The recent rise is still a historic 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 some 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 management company Carmignac, during a recent visit to Barcelona.
Well, if we are heading towards a normal situation, there are those who think that this stock market rise, largely driven by a single sector, is also normal. And that there is potential for further revaluations. "This concentration is not accidental, it is the reflection of where the economy will go, an increasingly robotized and algorithmized model," comments Víctor Alvargonzález, founding partner of the financial advisory firm Nextep Finance. "There is a lot of talk about a technological bubble, but in general the valuations are reasonable. I'll give you a fact: Alphabet's shares have risen by 164% in the last five years, and its profits by 160%", points out Alvargonzález.
In addition - he adds - other world stock markets are at historic highs despite the fact that 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 foundations that go beyond the sectoral concentration that reigns on Wall Street. "The only thing that happens - he qualifies - is that there can be a certain volatility. Because those who sign up for it now are usually the first to get out of it". Investors had never owed so much to so few.
