This is a fascinating fact: the latest leg of America’s long bull-market was driven almost exclusively by seven stocks, namely Alphabet (Alphabet), Apple (Apple), Meta (Microsoft), Nvidia, and Tesla. These are what Bank of America analysts have called “the Magnificent Seven”.
By the way, this might seem like a misnomer since the seven magnificents in the original Western were the good guys. The robber barons in the technology industry are not viewed by many the same way.
These stocks have risen by an average of 90pc this year. They collectively account more than 70% of the returns on the S&P 500 index, which is a leading US share index.
Market capitalisation is worth almost $11 trillion.
What’s driving these recent, astounding gains? Are they even remotely sustainable at all? Is this another tech bubble that is about to burst due to speculative valuation and political attack?
Artificial Intelligence. These seven people will benefit the most if AI is as transformative, as its supporters claim.
They seem to be in a position of almost unassailable advantage. Not just because of their technology lead or easy access to financing.
The big companies are also better able to manage and navigate the numerous regulatory requirements that have been imposed on the industry.
Existing incumbents benefit from the large data sets required to power AI. They have unrivalled digital access to information.
These companies are masters of capturing your data for commercial gain.
As we transition from one economic era to the next, existing semi-monopolistic position, backed by built-in product obsolescence, and a fiendishly obscure technology that no other party can access, will continue to be exploited ruthlessly to maintain dominance.
Politics and culture have focused on AI’s alleged existential threat to mankind. This has always struck me as over-egged. I admit, however, that I am not an expert in the technology’s capabilities and may therefore be falling prey to complacency.
But I know a little about commerce, monopoly, and regulation. The politicians are currently struggling to keep pace.
Some believe that the pace and complexity of technology is so fast that they will never catch up. They predict a dystopian world where we will be governed by corporations, not politicians.
The Magnificent Seven, their stock market valuations and other factors are all a threat. But the biggest one is overreach and the political and regulatory backlash that follows.
As the campaign season for the US Presidential election in 2024 approaches, expect to see a veritable posse pursuing them.
The gloves are off.
The traditional competition policy struggles to define and keep up with the emerging abuses.
With its proud legacy of trust-busting, America knows how to bring a delinquent, monopolistic company down to size. It has done so in the past when industries like railroads, Standard Oil and steel were born.
It is true that there are some significant differences between the past and present, which could give politicians pause before ordering a divorce or other harsh measures.
Many in Congress are not in a hurry to undermine the tech giants, which are a major part of American global power.
You never know who will step in to fill the void if you destroy these bastions.
Heaven forbid it could even be state-controlled tech companies in China, which are ideally suited for mass data collection, which AI depends on.
The AI may not be able to reach its full potential if it does not have the data.
Recent rulings in by US courts have reflected a similar mindset. The FTC had blocked Microsoft’s acquisition of Call of Duty game company Activision.
The FTC tried to tighten its approach towards Big Tech but the courts were not having it.
These companies have not gotten to where they are without manipulating public opinion to the point of destruction.
Similar statements were made about previous episodes of trust-busting: the politicians were playing with fire, the will destroy the American economy, the corporate leadership in the United States will be lost and so on.
After each breakup, there was a new economic rebirth with innovation and progress flourishing.
As it stands, no one is seriously talking about the nuclear option, which is a forced breakup. Even though this is a threat that is made by many lawmakers, as things stand now, there is still no serious discussion of it. If things continue as they are now, then it will happen.
There is growing concern about the way that large corporations lock their customers in, guaranteeing them an income annuity, which would not otherwise exist.
Apple is particularly adept at finding ways to get around the American laws on right of repair in the tech industry. Cyberspace is already rife with similar barriers to entry.
AI is a promising technology, but it will disappoint if it’s used by a few tech giants.
It is impossible to maintain an industry’s integrity without a vibrant and open competition. It may also be true for the stock market. For returns to be dependent upon such a small group of companies, it looks unhealthy and highly susceptible to regulatory risks.
Other risks have also been seemingly overlooked in the AI gold rush. The tech giants have all been shaped by the ultra-low rates of interest over the last 15 years.
Bank of America noted in a recent report that this “created the ideal petri dish for disruptive, long-term (no cash tomorrow, big growth today) themes to thrive, reinforcing nominal cyclical weak growth”.
This era has ended. There is no more free money.
The pandemic also hastened adoption, maturation and monetisation for many of these technologies, creating a Y2K like burst in overinvestment that will have to be paid back. Who knows when this gold rush will end but it will.