America’s giant tech monopolies have taken US stock market capitalization to dreamland proportions, and are waking up with a hangover as the era of easy money comes to an end.
Federal Reserve generosity drove stock valuations in the form of lower real interest rates, driving investment flows from bonds into stocks. The inflation that followed forced the Fed to tighten, and toppled the faltering stock market.
The Nasdaq 100 as of the April 29 close had lost more than 22% since December 28, when I asked, “Can tech stocks survive the Fed’s tapering?” I warned that technology stocks
Earning only 0.7% of total S&P 500 revenue, but they account for 12.2% of market capitalization. This marked difference in valuation may be the biggest bubble in market history: As the “real” or inflation-related yield of US Treasuries fell into extremely negative territory, the price of tech stocks rose in an almost perfect straight line. Investors buy technology stocks the way they used to buy utilities, as a source of monopolistic income streams whose value depends on the return to the risk-free alternative, in this case real treasury returns.
The tech pool is heading lower the way it came, tracking roughly the true Treasury yield.
During 2021, a monetary illusion prevailed as $6 trillion in federal stimulus boosted GDP growth — but caused inflation to rise even faster. Input costs even exceeded Amazon’s ability to raise prices, and the market-leading retail and computing giant posted its first loss in seven years during the first quarter. Amazon led the S&P 100, down 14% daily on April 29.
Alleged FAANG shares (Facebook, Apple, Amazon, Netflix and Google) are down nearly 30% over the year. Netflix is down 68% and Amazon is down 40%.
It could get much uglier if the US economy goes into recession. Thanks to 8.5% inflation, real hourly earnings in the US fell 2.7% in the year to March. Consumers used their stimulus checks to pay off credit card debt during 2020, but borrowed it in full during 2021.
The news on April 28 that US GDP contracted at an annualized rate of 1.4% during the first quarter was a bucket of cold water for the stock market. Modest growth was expected. Instead, the sharp deterioration in the trade balance pushed GDP growth to the negative level, despite a modest improvement in consumption, as I wrote yesterday.
Nothing like this has happened before. Net exports under normal conditions are negatively correlated with growth, for an obvious reason: economic growth naturally rises with higher demand, and higher demand for imports increases.
A combination of chronic underinvestment and a drain on the workforce after massive income subsidies left US industry unable to meet even the increase in consumer demand during the first quarter. Instead of producing more, the United States imported more, mainly from China. Evidence suggests that the United States did not produce more because it could not.
The tech giants have done a great job of byte and pixel production, but not much else. In February 2021, they traded at 50 times forward earnings. On April 29, the multiplier was 22 times forward earnings.
Consumers suffering under inflationary pressures are undoing the fluff. Netflix has warned that it will lose two million customers, and its share price has plummeted. If the United States enters a recession, the technology park could face something like the devastation that followed the 2000 recession. The Nasdaq 100 lost more than 80% of its value between March 2000 and September 2002.
I doubt it would be that bad – the leading tech companies of the 1990s are now real revenue-generating monopolies – but the worst is not over yet.
Follow David P. Goldman on Twitter @davidpgoldman