While Goldman Sachs, in a new report, goes out of its way to 'prove' that the current bubble in big tech is not a bubble at all, it has a funny way of showing it… by highlighting just how extreme valuations and market caps have become.
For instance, Amazon, Apple and Microsoft have a combined market capitalisation greater than the annual GDP of Africa (54 countries).
Technology is dominating economies and stock markets alike. Since the start of the financial crisis we have seen a dramatic rise in the dominance of technology in stock markets as well as the influence of technology on sectors in traditional industries. Quite how successful and dominant it has become is diffcult to overestimate. But such dominance of sectors and stocks is not without precedents and, as we will show, can be very long lasting.
The current size of the largest most powerful technology companies globally is put into some perspective in the ‘map’ above which compares some of the tech giants to the current annual size of GDP of some of the major European economies. Of course this is not a like for like comparison (a company value is the net present value of future expected cash flows whereas the size of GDP is an annual snapshot of an economy) but it nonetheless is fairly striking even when you compare the top technology stocks in size to other major markets.
But as the chart below shows that widens the comparisons to include stock market indices, the top 5 US technology stocks have a combined market capitalisation of more than the EuroStoxx 50 companies together. The top 20 global technology companies are bigger than the value of the STOXX 600 index of Europe.
But while tech dominates US markets, there are other examples of sectors that have achieved very strong growth which, like technology, has been driven by strong fundamentals.
One interesting example is the European luxury sector. The similarities are not immediately apparent but, like technology, luxury goods are a global sector with long duration and so benefit from relatively weak growth.
Also this is one of the few sectors where Europe ‘dominates’ an industry and are often seen as having few substitutes. It is also the case that, like the technology sector, much of the success of recent years has been driven by genuine earnings growth. Unlike the technology sector, however, the luxury goods sector has a limited global market and the stocks are much smaller in terms of their impact on the broader market.
It is also worth noting from Exhibit 18 that while luxury has been successful in generating earnings growth it has underperformed the earnings of the technology sector over the last 10 years despite similar price appreciation.
So, simply put, US big tech rules the world… for now.