The Days Ahead:

  • Inflation report and retail sales.

This Week:

  • The Mag 7 are not as big as companies used to be.
  • Other markets have no problems with more concentration.
  • Infrastructure spending is big and will run for many more years.
  • It’s a big boost to public construction.
  • Big businesses and stock market themes don’t always make great investments.
  • We look at the lessons of the cell-phone boom.

Who’s Afraid of the Mag 7?

Seems you can’t read an article today without comments about the Mag 7. As a reminder the Mag 7 is Apple, Microsoft, Google, Amazon, Nvidia, Tesla and Meta. Together they account for 30% of the S&P 500 index. With the rest of the top 10, of Berkshire Hathaway, Eli Lilly and Broadcom, they’re 36% of the index.

Since January 2023, their prices have gone up between 55% for Google and 495% for Nvidia, for an average price return of 160%. In 2023, the Mag 7 accounted for around 20% of the S&P 500’s 26% total return in 2023. Here the top 10 in 2024 are:

Market commentators think the market lacks breadth and hasn’t been this concentrated since 1989; that the top seven companies, at 30% of the index, are at an all-time high and roughly 7% above the dotcom peak of 22%; and that all the market hopes and dreams are pinned on Artificial Intelligence (AI) and companies can’t possibly keep up with the hype.

We’d disagree on several fronts.

First, when commentators talk about an “all-time” high of concentration, they only go back to 1980. But the stock market existed before 1980. If we look further back there are many times when the S&P 500 was more concentrated than 2024. Here’s the data from 60 years ago.

AT&T at 12% was worth almost twice Apple’s current weight of just 7% and the top 10 were 41% of the market’s value of $418 billion. In the 1950s just three stocks, General Motor, Exxon and AT&T often accounted for around 28% of the market, roughly what the top 10 do today.

Second, there are claims that stock market concentration impedes growth. But in the 1950s, U.S.  GDP grew 40% and in the 1960s, grew 50%. Whatever the failings of stock market concentration, a lack of economic growth isn’t one of them.

Third, the U.S. is a very dynamic economy. Some of the 1964 firms are still around with the biggest, Exxon at number 29 in the S&P 500 and GE at number 86. The Mag 7 stocks are all youngsters. Most of the founders are alive and the oldest stock, Apple, went public in 1980. Five of them are not even 25 years old.

One can see this evolution play out over the years. In 1900, railroads were 63% of the U.S. stock market. In the last 124 years, they no longer have their own sector and you’d think they were the ultimate declining industry. Yet, along the way they merged and changed and are up 1,633% in the last 20 years, against the S&P 500’s 343%. So, dynamic companies, old and new invent and reinvent industries. Stock market concentration does not impede success.

Finally, we’d point to other markets to see how concentration compares to the S&P 500:

The U.S. with its top companies at 32% of the index is dwarfed by some major markets. True, there are some very big whales swimming in some small pools. Novo Nordisk, a global leader in weight loss and diabetes drugs, accounts for around 60% of the Danish index and is 15 times larger than the second largest company DSV, an air, sea and road freight company.

Among the single country indexes, only Japan is less top-heavy than the U.S. As we’ve made the point in these pages before, Japan is reawakening to a 34-year stock market recovery so there hasn’t been the time to see big champions reemerge. But they will.

We’re not overly concerned about concentration. It’s been higher in the past and other markets are higher. American businesses and industries continue to compete and evolve. The top 10 list will change, and in 10 years, we’ll be writing about a new Mag 7, or Excellent 8 or Tremendous 10 or Terrific 12 (Ed: ok, you’ve made your point).

And investors will be better for it.

Where’s All the Infrastructure Spending?

Last week the January construction numbers came out and an astute colleague pointed us to the public construction figures. Here they are:

The blue line shows a 30% growth in public construction over the last two years and the green line shows 40% growth in spending on highways and streets. Public construction spending is now around 23% of all construction spending, up from 19% in 2022. After the housing crash in 2009, public construction soared to 40% of all construction as residential building plummeted. Recently it’s grown quickly, particularly in manufacturing construction (up 36% on the year), power generation (+70%) and water (+22%).

The reason is because of four bills. The Inflation Reduction Act (IRA)  with $890 billion of spending, the Infrastructure Investment and Jobs Act (Infrastructure) at $1,200 billion, the American Rescue Plan Act (Rescue) at $1,900 billion and the Creating Helpful Incentives to Produce Semiconductors, or the CHIPS Act, at $280 billion.

Not all the money is for infrastructure. 😰

The IRA act, for example, expanded the Affordable Care Act and Medicare. But its infrastructure spend is around $370 billion for clean energy, battery supply chains and public transport. It also plans to build out electric vehicle (EV) charging locations, which only grew 13% in 2023, after five years of growing at 21% annually. There are 58,000 locations in the U.S. compared to 160,000 gas stations, so there’s some way to go. The program runs to 2031.

The Infrastructure Act spend is about $550 billion and focuses on highways, broadband access, clean water, rail and electric grid renewal. Funding expires between 2026 and 2031.

The Rescue Act was mostly about transfer and stimulus payments but local governments were granted $350 billion to apply for infrastructure projects. Most of the money went to cover operating deficits. Infrastructure and capital spending was only about $40 billion. The deadline for spending is December 2024, so by now, nearly all the monies are spent.

The CHIPS Act provides $280 billion in subsidies, tax credits and research specifically for semiconductor and chip manufacturing. About $175 billion goes to NASA, the Department of Energy and the National Institute of Standards and Technology for operations and research. Funding expires between 2026 and 2030.

So, if we sum the infrastructure parts together, we get to about $1,000 billion over 10 years. Some of that will be research and grants to keep existing facilities going. The amount spent or committed so far is around $650 billion. Some $235 billion of the total $650 billion is in semiconductors and $161 billion in EVs and batteries.

The biggest semiconductor spending is the Texas Instruments plant in Sherman, TX, for $30 billion, which will employ 3,000 people. There are 13 investments of over $1 billion in six Midwest and Southwestern states.

If we include all the projects for clean power, industry and energy manufacturing, we get the map below. This covers some 3,800 private sector projects from all four programs. Together they account for another $254 billion.

The Infrastructure Act also covers public investment, which, if we were to show the map, would cover just about every county in America. Some of the biggest investments include $4.7 billion for Amtrak’s Frederick Douglas Tunnel in MD and $1.6 billion for the TerraPower Reactor Program in WY.

There are around 47,000 projects with $435 billion funded by the Infrastructure and IRA acts and $160 billion from the CHIPS Act. Much of the money is co-invested with the private sector.

So, what does all this mean for the economy?

First, we’d reiterate what we discussed last year, that on-shoring of batteries, EVs, and semiconductors is a multi-year play on better logistics and manufacturing skills.

Second, the increase in manufacturing facilities and capex will slow but it’ll still run at annualized rates of over 10%.

Third, much of the CHIPS and IRA spending is yet to happen. The CBO reported that the budget effect decreased the deficit by $28 billion in 2023 but increases it by $50 billion in the next three years followed by a decrease of $113 billion from 2028 to 2031. That makes sense because a chip plant can take years to come on line so would not actively contribute to labor and production for another three years.

Overall, the pattern we should see is continued but slowing public construction, increased capex expenditure as buildings are tooled up and finally increased production as they come on line. But this will take years to play out. Meanwhile, expect a lot of news about infrastructure spending in the coming electoral months.

Big Technology Shifts Don’t Always Make Great Investments

AI and EVs are exciting technologies. After all we’re talking about transistors 250,000 times smaller than an amoeba, and six times smaller than a virus. Two hundred million transistors can fit on one square millimeter. Some chips contain 300 miles of wiring and switch on and off billions of times a second. To this very non-STEM writer, the physics are mind boggling.

But while a company may benefit from the halo effect of a new technology, investment results may not follow. Take Cisco in 1999. For a while, Cisco was “king of the internet” building the routers, hubs and switches that allow internet voice and data to travel from one place to another. In 1995 it sold $1.9 billion of products and made a $421 million profit. Sales grew to $12 billion by 1999 and it made $2 billion. Sales grew to $22 billion in 2001 but it lost $1 billion. From 2007 to 2023 it grew net income from $8 billion to $12 billion. That all sounds good. But the stock peaked in 2000 valuing Cisco at $555 billion. It traded at 22 times sales. In the next two years it fell 90% and today remains 40% below its peak 24 years ago. It trades at 3.5 times sales.

It’s a hard lesson that companies that seem like a direct play on a new technology, don’t necessarily make great investments. In another example, here’s the growth of mobile phones per 100 people and the performance of telecommunication stocks in the S&P 1500:

Cell phone ownership in the U.S. grew from six per 100 people in 1993 to 110 in 2022, meaning people own more than one phone! Europe went from 0.7 to 123. The direction and growth were phenomenal. Not so for the S&P 1500 telecom sector, which peaked in 1999 and remains 30% below its high. A $100 investment in 1999 is now worth $86. For the S&P 500 it’s $357, excluding dividends.

It’s a reminder that while we can safely predict that AI will be transformative, picking the winners is no easy task.

The Bottom Line

We’re writing this the evening before the jobs number, which is the biggest news maker of the week. We’re not expecting any fireworks and, as we’ve mentioned before, the confidence interval on the report is +/- 130,000. The consensus is for around 150,000.

Chair Powell’s talk to Congress this week contained little new. That’s in keeping with the forum. The Fed should never signal policy changes other than through the FOMC. His talk coincided with the latest Job Openings report, which showed the number of quits, or voluntary job leavers, at its lowest rate since February 2021. The Challenger layoffs report also suggests there’s gradual loosening of the labor market.

The other report was the Fed’s Beige Book which surveys all 12 Fed districts on business conditions and tends to live up to its name. It was mostly about moderating inflation and reducing remote working.

The 10-year Treasury rate fell to 4.1%, down from the 4.17% to 4.30% range from the last month. The S&P 500 hit another all-time high and is up 8.3% year to date. Small company stocks, which have had little respect from markets for the last year, outperformed larger companies. European stocks continued their move up, mostly on the back of the ECB talking about lower rates in June.

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Art of the Week: Kylie Manning (b. 1983)

Please read important disclosures here.