Whether or not Apple’s revenue warning ends up being seen, in hindsight, as a harbinger of cascading guide-downs from companies whose supply chains and product markets are exposed to the coronavirus outbreak, Tuesday does serve as yet another cautionary tale about a market that’s arguably too dependent on a handful of tech behemoths.
To be sure, this is a somewhat tired discussion. Digital reams have been written on the extent to which US equity benchmarks are beholden to a few monopolies, all of which seem to have a date with regulatory destiny.
“We are seeing extraordinary concentration of returns at the very top of the market”, Morgan Stanley’s Mike Wilson cautioned last month. He added the following particularly poignant color:
The five largest companies, or the top 1%, currently make up 18% of the market cap of the S&P 500. This is the most extreme this metric has ever been. The last time we saw something even remotely this high was 1999, at the end of the tech bubble…. While we don’t think there is a valuation bubble in tech anywhere near the scope of what we experienced in 1999, the concentration in tech stock performance is unhealthy in our view and arguably unsustainable.
It’s through that lens that market participants should view days like Tuesday, when some exogenous shock outside the control of even the most skilled corporate luminaries undercuts the near-term revenue prospects for one of the companies which shoulders a disproportionate share of the burden when it comes to keeping the broader market buoyant.
In a true testament to this, SocGen’s Andrew Lapthorne wrote the following, in a note dated Monday:
With the bulk of US companies having reported, we have summed up the report and accounts posted so far. Despite strong markets last year, net income barely moved, with a rise of just 0.3%. More worrying is without the Big 5 companies (Microsoft, Alphabet, Apple, Amazon and Facebook), net income fell 7.5%.
The following visualization shows annual growth rates for companies in the S&P 1500 that have reported.
(Data from SocGen, Factset)
“This is due to higher costs (SG&A) and a significant rise in both interest expense and taxes”, Lapthorne says, before noting that “interest costs rising so quickly despite low rates is remarkable and a challenge to policymakers”.
In other words: In a world awash with debt, higher rates may be a non-starter. Policy normalization may have been rendered impossible by the very debt accumulation it engendered and facilitated.
Another thing that sticks out (like a sore thumb) in the visual is that when it comes to buybacks, the Big 5 are the last men/women standing, so to speak.
“With 80% of the overall value of buybacks reported so far, buybacks are 20% lower in 2019 than 2018 – excluding the Big 5, the figure is down 32%”, Lapthorne marvels.
The takeaway, he says, is simple: “That the Big 5 continue to buy back while the rest cut back no doubt helps explain the performance divergence” between those names and the rest of the market.