Another Quick Word On The Market’s Tech Addiction

Earlier this week, in “The ‘Greatest Risk’ To The ‘GAMMA’ Stocks,” I mentioned SocGen’s Albert Edwards in the course of briefly discussing the notion that America’s tech titans might struggle to meet lofty sales growth expectations if the threat of regulatory action has a chilling effect on M&A.

According to Goldman, the FAAMG contingent has announced just 20 acquisitions so far this year, nowhere near the 15-year average.

If the giants can’t grow through acquisitions, they’ll need organic growth, and as Goldman emphasized, “finding productive uses of cash at scale may prove challenging.” The bank’s David Kostin noted that in the aftermath of the dot-com bubble, the five largest S&P companies posted sales growth that was just half of that expected by the market on the eve of the bust.

SocGen’s Edwards has variously suggested that parts of the US tech complex may be more cyclical than many investors believe, and as such, a “regular” recession (as opposed to an anomalous shock like COVID) might expose which companies are growth “imposters,” so to speak.

“Yes, the US tech sector has enjoyed extraordinarily robust profit growth, particularly during the 2020 COVID recession, but that allowed the tech cyclicals to continue in the pretense that they were also ‘Growth’ stocks by turning in a robust profit performance,” Albert wrote last month, recapping, on the way to warning that “an ordinary recession would put these ‘growth’ imposters to the sword, just as they were in 2001.”

Of course, failing to impress Wall Street’s expectations for top line growth is something different from preserving profitability, and margins are hefty both in Info Tech and Comms Services.

My point here, though, isn’t to delve too deeply into this discussion — I’ve covered it ad nauseam. Rather, I wanted to highlight excepts and a few visuals from Edwards’s latest missive, which featured updated versions of Gerard Minack’s FAAANM charts.

Albert’s chart titles do all the talking. US equities have made a mockery of their global counterparts over the past dozen years, and it’s almost entirely attributable to just six companies (figures below).

Those visuals never lose their capacity to “wow,” despite the ubiquity of the “concentration risk” narrative.

The figures (below) are even more remarkable. “One key story… is that excluding the six ‘Tech’ FAAANM stocks, profits growth in the S&P494 stocks has been little different from the rest of the world,” Edwards wrote. “Another is that the FAAANM stocks saw their explosive re-rating only over the past five years.”

Ultimately, we’re left to ponder the same question: What happens if something changes?

Although it’s probably safe to assume mega-cap US tech will continue to print money, a simple de-rating could pose a material headwind for multiple indexes given the weighting of big-cap tech names.

And that’s to say nothing of a less favorable macro environment, whether that means a “hotter” climate defined by robust nominal growth and rising yields or, as Edwards has suggested, a less “tech-friendly” recession that exposes the cyclical nature of any growth “imposters.”

If nothing else, it’s food for thought.