When the Dow Jones Industrial Average ceded with a bigger losing streak since last September, dwindling over 2.99 percent, the blue chips disembarked in the red for 2023.
MAMAA stocks have a collective market cap exceeding $6.6 trillion and with S&P 500’s total market cap being about $30.1 trillion in September, these five stocks had accounted for 22 percent of the entire index.
Big tech stocks took a massive hit in 2022, with each of the MAMAA stocks declining at least 13 percent, year-to-date. Once at the dais of success, tech stocks were imperial to the market and now they are taking it down with them. According to a report by Barron’s, the past couple of weeks have been ruinous for S&P 500 Index and the NASDAQ Composite which have pruned by 2.67 percent and 3.33 percent, respectively.
But what makes the situation unfavorable for other stocks and assets is not just the impending rise of interest rates but also that investors haven’t experienced the economy’s losing steam.
Former chief economist at Wells Fargo, John Silvia, now heading Dynamic Economic Strategy pointed out the real final sales were slowing and this could present a problem for equities and real estate – slower earnings pressured by capitalization rates have negative consequences. (Real final sales are gross domestic product less inventory).
This has been relatively different from the economic slowdowns between 2005-2009 and even 2020, for that sake. During these skirmish times, diminishing interest rates were able to help offset weak growth. But this time, the rates have had to begin from zero and need to push much more to even closely resemble the historical figures.
The rising interest rates shoved investors out of risk assets and revenue growth rates of large-cap tech stocks have been abating, which has triggered compressed valuations in the market as higher rates reduce the value of future cash flows.
“Stocks that have traded at excessive valuations have to be re-priced and big tech companies are still adjusting to the realities of a lesser speculative and more reality-based sensible valuation.”
Is The Market Influenced By Big Tech Stocks?
According to Bloomberg, the FAANG + MNT stocks (Facebook/Meta, Amazon, Apple, Netflix, Google/Alphabet, Microsoft, Nvidia, and Tesla) warranted for 3.05 percent points of the 3.81 percent advance in the S&P 500 Index, through the turn of the year in February 2023. This data is indicative of the dependency of the stock market on the performance of these big tech stocks.
The reign of FAANG stocks was imminent because they obeyed all the rules that propelled positive changes in their company’s stock prices, as per Forbes.
Additionally, before the rates started to move upward, the S&P 500’s year-to-date advance had been reduced to less than 50 percent of its highest peak of 8.10 percent on 2nd February.
In November 2021, the FAANG feeling began to wane when investors reached a peculiar conclusion of the Fed raising interest rates to fight persistent inflation, with Jerome Powell being re-nominated as the Fed Chief. This triggered the dormant sectoral rotation.
The concept of ‘beat and raise’ reveals that for any company’s stock price to rise, the company must report quarterly revenue and earnings growth, to boost the forecasts exceeding investors’ expectations. While investors can’t judge for certain whether or not a company will beat and raise every quarter, they can certainly draw conclusions from its track record. Investors bet on long-term decisions by assessing if the company is favoring good investments in future growth.
And this phenomenon is superseded by sectoral rotation – the contrary decision that shifts capital from high-growth tech companies to alleged cyclical stocks when they are driven by expectations that higher interest rates will bump its value.
How Can Smaller Tech Companies Survive Without The Big Tech?
All the big tech companies are suffering from the bite of competition. So can smaller tech companies survive without the dominion of the humongous corporations of tech? The answer is a plausible yes.
Small tech companies can do so because their target market is something which big companies consider trivial to be bothered with. All the MAMAA stocks have technology at its foundation but all are not considered tech stocks as per GICS (Global Industry Classification Standard). While Alphabet and Meta are classified under Communications Services Stocks, Amazon is labeled as a Consumer Discretionary Stock.
Many smaller companies design applications for specific purposes which might be inconsequential for a bigger company. For example, a smaller company can make tens of millions in revenue by designing a simple software which could collate data from the sensors of a prototype aircraft but a company like Microsoft would not even consider any project that could project any earnings less than $100 million. While larger companies focus on the big, small-scale companies can experiment with lots of ideas to be imbued in, succeed, and later be acquired by the same large company.
MAMAA or FAANG are dominant in their field as they have amassed huge economies of scale that act as a barrier to keep other companies at bay. Could monopoly be a chance at innovation because big tech companies need not worry about competition? Maybe, but large companies just struggle to do so because they cannot be as successful as a small/new company with a single focus to innovate. Big tech does not need to innovate anymore because they just have a fiduciary responsibility to make money for shareholders, which they certainly do.
When the Federal Trade Commission (FTC) shifted into its antitrust probing in the United States’ largest tech companies in 2019, it marked a new phase of implicating this monopolistic behavior.
According to a report by the Wall Street Journal, the investigations were primarily focused on the patterns of how systematic acquisitions targeted younger startups that could disrupt the monopoly status quo of the industry if they became big.
The reason for this probe was to determine if the industry giants were evading regulatory scrutiny and acquiring companies that could potentially harm its competition and hurt the consumers and hence, ordered Amazon, Apple, Facebook, Microsoft and Alphabet to provide comprehensive information of all the acquisitions of fledgling companies over the past decade.
While the investigations are advancing more than before, highly diversified streams of business and revenue can aid at least 3 of the MAMAA five, namely Apple, Amazon, and Microsoft, in countering their antitrust arguments.
