Stop Worrying and Learn to Love the Triumph of Big Tech

Posted on July 8, 2024 by angelo

Stop Worrying and Learn to Love the Triumph of Big Tech

If you still have doubts about the power of the biggest names in this market, Friday’s performance should dispel them: Meta Platforms added $29.95, or 5.8%, bringing its gain this year to more than 52.8%. Amazon rose $2.41, or 1.2%, and is now up about 31.6% in 2024. Alphabet added $4.78, or 2.5%, for a year-to-date return of more than 36.6%. Microsoft added $6.79, or 1.4%, and is up 24.8% for the year. Apple added $4.79, or 2.1%, for a gain of 17.9%. These are simply astounding gains for these mega-cap tech stocks in the portfolio. Sure, Nvidia lost a few dollars on Friday as the chipmaker continues to adjust to its 10-to-1 split. But the stock is still up 154.1% for the year. By comparison, the broader S&P 500 is up 15.7%, while the more tech-heavy Nasdaq Composite is up 22.2%. Let’s forget for a moment that we also own Eli Lilly. Shares of the drugmaker rose $16.47, or 1.8%, on Friday, bringing its total gain for the year to 57.4% — despite a vicious and gratuitous political attack from President Joe Biden. Biden, who has waged a not-so-subtle war on the pharmaceutical industry since taking office, on Tuesday called on Lilly and Novo Nordisk to cut prices on their weight-loss and diabetes drugs. It’s the tech titan’s triumph over everything, everything in the world. How much of this rally is based on the strength of recent earnings versus the belief that earnings won’t dissipate if gross domestic product slows with a concomitant decline in inflation? The latter is something that the June consumer price index (CPI), out Thursday, could prove pivotal. The answer is that these tech giants—plus Lilly because of its explosive GLP-1 franchise that is outpacing its competitors by a wide margin—are seen as triumphant no matter which way the economy goes. They are seen as saints. It’s that simple. Unlike the sports world, Wall Street is a place of theses. We may believe, for example, that there are elite teams in the purity of the National Football League. We attribute their success to management teams that put the best players on the field and move them well. We’re not saying they have a secular wind at their backs. On Wall Street, we have to attribute the gains to something more than executives’ ability to get the best products on the ground and move them well. We’re not saying: Apple’s business is much better than we thought. We’re saying that Apple can transcend the economy because its consumer business is so strong that its peers—not competitors, but peers—will flood it with the AI they’ve spent billions of dollars on. The only question is which AI company will pay Apple the most for access to its 2.2 billion active users, because the company isn’t big enough to continue to dominate. These are companies that are inventing incredible franchises—YouTube, Reels, Amazon Web Services, Copilot—that can handle the hurdles of a downturn. There are a few others. Costco and Walmart are both up about 34% this year, capturing the zeitgeist of a frugal consumer in the midst of an economic crisis. Of course, there is the effervescent Tesla, the unsinkable creation of Elon Musk, once again in the dark, purely thanks to a cult of personality. How dare we doubt his alchemy? But the theses, the endless theses. They are almost romantic—more fanciful than factual—in discrediting the ability of the best to improve. They keep coming back to one main point: you can’t let these companies dominate without something bad happening to the stock market. The lack of belief that the rise of these stocks is actually good for the market is a fact. Ever heard: Thank God for these stocks? No, it’s about the impossibility of these companies continuing to dominate without suffering a decline of some magnitude—perhaps even a large decline. Let me present another factual manifesto: the companies that are making these incredible gains are companies that are constantly inventing. There is never a time when something new doesn’t work for them. Their stocks beat the average because their business, based on innovation and not financial engineering, transcends the innovations of others. Is it really a coincidence that the most inventive of the pharmaceutical companies rivals the performance of the smallest capitalization of these mega-caps? I don’t think so. The denigration of a market based on the advances of a handful of saints has a double pernicious nature. The first is that these stocks have become ridiculously overvalued. The second is that no sane person would invest in a market dominated by a handful of stocks. Let me address both points. The first is true to some extent. How did Apple get such a high multiple (34 times earnings) when we are used to 23 times at best? The triumph of the consumer market over the enterprise 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 at Amazon and Microsoft, other than twice the market multiple and a little more? I don’t know. Like Nvidia, they could turn out to be cheap on next year’s numbers. Or we just don’t know how to value them and we’re just paying the maximum amount, like courtside NBA tickets or a box seat on the fifty-yard line. What’s much more important to me: Why the hell does this matter to the overall market? If you have most of the new index funds, what do you expect? Every new dollar is in more than 25 cents for these companies. You want them to get smaller? Then you need the index money to move out of the market. But we all admit that most index funds are sticky, if not glued, to the S&P 500. So what’s the problem? Why not complain about passive investing as the culprit and not about a nonexistent titan cult? You know my bias: they are the best in good times and bad. But their incredible market caps have much more to do with “money coming in” than with some outlier scenario that will be foiled by events or Treasury auctions like the 10- and 30-year Treasuries we have this week. In that sense, I have had to take a “stop complaining” view of their strength, lest I feel compelled to sell them. You could say that the Club’s strength lies in its insistence on not locking us into false dogma about these stocks. The Circe will not stop. Tie yourselves to the mast for tomorrow’s round of “the unsustainable.” I will, once again, ask myself why the Club is abnormal. Why do so many people have to be driven out of the market because of concentration if 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 that superiority means a bigger slice of a growing pie even if some of the multiples have slipped relative to revenues? So once again, the temptation to take profits will be there. And once again, that temptation, justified by the fictitious thesis of a market collapsing under the weight of mega-caps, or a Samson-type ETF, must be resisted. Or ask yourself: hasn’t the complaint been at the forefront for many years? Has it ever been justified? On that basis, the defense of the status quo rests. Let the charge begin again, perhaps with some kind of new theory, or perhaps with no theory at all except that “this can’t last.” In response, I would say that not only could it continue, but we should expect others to join us. (See here for a complete list of Jim Cramer’s Charitable Trust stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED, BY REASON OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR BENEFITS ARE GUARANTEED.

The logos of Amazon, Apple, Facebook and Google are seen in a combined photo from Reuters files.

Reuters

If you still have doubts about the power of the biggest names in this market, Friday’s performance should dispel them: