Stop worrying and learn to love the triumph of Big Tech
July 7, 2024
If you still doubt the power of the biggest stocks in this market, Friday’s performance should put your doubts to rest: Meta Platforms gained $29.95, or 5.8%, taking its gain this year to over 52.8%. Amazon gained $2.41, or 1.2%, and is now on pace to gain around 31.6% in 2024. Alphabet gained $4.78, or 2.5%, for a year-to-date return of over 36.6%. Microsoft gained $6.79, or 1.4%, for a year-to-date gain of 24.8%. Apple gained $4.79, or 2.1%, for a year-to-date gain of 17.9%. Those are simply jaw-dropping gains for these mega-cap tech stocks in the portfolio. Sure, Nvidia lost a few bucks on Friday as the chipmaker continues to work on its 10:1 split. Yet the stock is still up 154.1% year-to-date. For comparison, the broad-based S&P 500 index is up 15.7%, while the more tech-heavy Nasdaq Composite is up 22.2%. Let’s put aside for a moment that we also own Eli Lilly. The pharmaceutical company’s shares rose $16.47 (1.8%) on Friday, bringing its total gain for the year to 57.4% – despite a vicious and entirely baseless political attack from President Joe Biden. Biden, who has waged a not-so-subtle war on the pharmaceutical industry since taking office, called on Lilly and Novo Nordisk on Tuesday to lower the prices of their weight-loss and diabetes drugs. This is a triumph for the tech giant over anything, anything in the world. How much of this rally is based on the strength of recent earnings and how much on the belief that earnings will not dissipate as gross domestic product slows and inflation falls at the same time? The latter could prove crucial when the consumer price index (CPI) for June comes out, due Thursday. The answer is that these tech giants — and Lilly, because of its explosive GLP-1 franchise that is way ahead of the competition — are seen as winners regardless of the economic situation. They are canonized. Plain and simple. Unlike the world of sports, Wall Street is a place of thesis. We may think there are elite teams within the pure National Football League. We attribute their success to management teams putting the best players on the field and using them properly. We are not saying they have a secular tailwind. On Wall Street, we have to attribute profits more than to management’s ability to put the best products on the field and then use them properly. We’re not saying Apple’s business is doing much better than we thought it would. We’re saying Apple can outperform the economy because its consumer business is so strong that its competitors — not competitors, but peers — will shower it with the AI they’ve spent billions of dollars developing. The only question is which AI company will pay Apple the most to gain access to the 2.2 billion active users of its devices, since the corporation isn’t big enough to maintain its dominant position. These companies are inventing amazing franchises — YouTube, Reels, Amazon Web Services, Copilot — that can handle the obstacles of an economic slowdown. There are a few others. Costco and Walmart are both up about 34% this year by capturing the zeitgeist of a frugal consumer in an economic bind. And of course there’s the bubbly Tesla, the unsinkable brainchild of Elon Musk, which has returned to profitability on the strength of a personality cult alone. How dare anyone doubt their alchemy? But the theses, the endless theses. They are almost novelistic – more fantasy than fact – in discrediting the ability of the best to get even better. They always come back to one main point: these companies cannot dominate without something bad happening to the stock market. It is clear that there is no belief that the rise of these stocks is actually good for the market. Have you ever heard: thank God for these stocks? No, it is just that they cannot maintain their dominance without a decline of some magnitude – perhaps even a large magnitude. Let me present another manifesto, based on facts: the companies with these amazing price gains are companies that just don’t stop inventing. There is never a moment when something new doesn’t work for them. Their stocks outperform the average because their businesses, based on innovation, not financial engineering, outperform the innovations of others. Is it really a coincidence that the most inventive pharmaceutical company can match the performance of the less capitalized mega-caps? I don’t think so. Denigrating a market based on the advances of a few saints has a two-fold insidious nature. First, these stocks have become ridiculously overvalued. And second, no one in their right mind would invest in a market dominated by a handful of stocks. Let me address those two points. The first is true to some extent. How could Apple achieve such a high multiple (34 times earnings) when we’re used to 23 times at best? Through the triumph of the consumer market over the corporate market. But Alphabet and Meta’s multiples in the mid-20s don’t seem that expensive. What are we supposed to pay for the best of the best in Amazon and Microsoft other than double the market multiple and then a little more? I don’t know. Like Nvidia, they might turn out to be cheap on next year’s numbers. Or we just don’t know how to value them, so we just pay top dollar, like courtside NBA tickets or a box at the fifty-yard line. More important to me: Why the hell does this matter to the overall market? If you’ve indexed most of the new money, what do you expect? Every new dollar is worth more than just a quarter to these companies. You want them to get smaller? Then index money needs to be taken out of the market. But we all accept that most index money is stuck, if not glued, to the S&P 500. So what’s going on? Why not complain about passive investing as the culprit rather than a nonexistent cult of the titan? You know my bias: These are the best in good times and bad. But their incredible market caps have a lot more to do with “money in” than some kind of crazy scenario that gets nullified by events or Treasury auctions like the 10- and 30-year ones we have this week. With that in mind, I’ve had to take a “stop whining” view of their strength so I don’t feel compelled to sell them. One could argue that the strength of the club is that we are not bound by false dogma about these stocks. The circles aren’t going to stop. Strap yourself to the mast for tomorrow’s “unsustainable” round. I’ll ask again why the club is an exception. Why do so many people have to be pushed out of the market because of concentration when it can be justified by invention and capital flows? Isn’t it enough to say that sheer mental acuity is enough to justify superiority, and superiority means a bigger piece of a growing pie, even if some of the multiples are out of whack compared to earnings? So the temptation to take profits will be there again. And once again, that temptation, justified by the fictitious thesis of a market collapsing under the weight of mega-caps or a Samson-like ETF, must be resisted. Or ask yourself: Hasn’t the complaint been front and center for many years? Was it ever correct? That ends the defense of the status quo. Let the charge begin again, perhaps with some kind of new theory, or perhaps without any theory at all other than “this can’t possibly continue.” As a counterargument, I’d say it might not only last, but look for others to join in. (A full list of stocks in Jim Cramer’s Charitable Trust can be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. After sending a trade alert, Jim waits 45 minutes before buying or selling a stock from his Charitable Trust’s portfolio. When Jim has discussed a stock on TV, he waits 72 hours after the trade alert is issued before executing the trade. THE INFORMATION REGARDING INVESTING CLUB SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY AND OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY EXISTS AND WILL NOT BE CREATED BY RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH INVESTING CLUB. NO PARTICULAR RESULT OR PROFIT IS GUARANTEED.
A combination photo from Reuters files shows the logos of Amazon, Apple, Facebook and Google.
Reuters
If you still doubt the power of the largest stocks over this market, Friday’s development should dispel your doubts:
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