💵 The End of Big Tech Dominance

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Roughly 40% of all stocks have suffered a permanent -70%+ decline from their peak value.

For Technology, Biotech and Metals & Mining, the numbers were considerably higher.

Professor Jeremy Siegel analyzed the Nifty Fifty era in his book Stocks for the Long Run, and determined companies that routinely sold for P/E ratios above 50 consistently performed worse than the broader market (as measured by the S&P 500) in the next 25 years, with only a few exceptions.

At the peak of the great bull market of the late 1990s, the four largest stocks in the S&P 500 (MSFT, CSCO, GE, and INTC) collectively accounted for 16% of the equity capitalization of the index.

Today, those stocks in aggregate account for just 6% of the benchmark. One year ago, the aggregate market cap of the current tetrad of largest stocks (AAPL, MSFT, GOOGL, and AMZN) accounted for 22% of the index.

However, during the past 12 months the market cap share of these companies has declined to 18% as the top four stocks in aggregate returned -25% compared with a -13% return for the other 496 stocks

If Amazon were to pull it off, it would be the most aggressive expansion of a giant company in the history of modern business.

The evolving market share of the current leading stocks reflects changes in growth and valuation relative to the rest of the market. Between 2010 and 2021 the mega-cap tech firms generated remarkably high average annual sales growth of 18% vs. just 5% for the broad market. However, the dynamic has reversed this year.

Aggregate sales growth for mega-cap tech is forecast to rise by 8% this year, well below the 13% growth expected for the overall index. Looking forward, the premium sales growth that was the characteristic most closely associated with mega-cap tech firms for the past decade has compressed dramatically.

The consensus 2021-2024E annualized sales growth for the top four stocks equals 9%, only modestly above the 7% annualized growth forecast for the rest of the market (Exhibit 29).

One year ago, we noted that the greatest risk to the leading Tech stocks was the need to maintain their lofty expected sales growth rates.

During the two years following the March 2000 Tech Bubble zenith, the four largest firms at the time collectively posted half the sales growth that had been expected by consensus (7% vs. 16%). The group’s relative valuation contraction was dramatic.

The diminished sales growth premium of the current mega-cap Tech stocks has also been accompanied by a contraction in the valuation premium.

One year ago, the mega-cap tech firms traded at EV/sales multiple of 7x vs. 4x for the other 496 stocks in the S&P 500. The difference has since narrowed substantially to 4x vs. 2x (Exhibit 30).

In the current interest rate environment, mega-cap tech stocks are collectively expensive relative to bonds (Exhibit 31). The earnings yield gap vs. real rates currently equals 270 bp compared with a 15-year average of 451 bp (a below-average yield gap implies an above-average valuation relative to history).