Big Tech can’t keep rising when the economy is sinking

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Apple, Amazon and Microsoft each has a market value of about US$1.5-trillion, equal to the GDP of Spain or Australia. Google owner Alphabet, at an even US$1-trillion, is worth more than the GDP of the Netherlands. Tesla has surpassed Toyota to become the world’s most valuable automaker and is worth considerably more than Exxon Mobil, one of the world’s biggest oil companies.

The greatest tech rally in decades has yet to take a breather and has added hundreds of billions of dollars to the wealth of investors since March, when pandemic lockdowns around the world shut economies and pulverized stock markets.

If there were ever a market rally that completely defies what’s happening at street level, where millions of workers are losing their jobs, this is it. Big Tech worshippers are treating the sector as both a defensive play and an enduring growth story, one that can miraculously insulate itself from the hell zone that is the broader economy. It can’t.

The tech-heavy Nasdaq market is up by more than half since its March low, taking the one-year gain to 26 per cent. About 40 per cent of Nasdaq’s value, and more than a quarter of the S&P 500′s, is composed of just four stocks: Amazon, Microsoft, Alphabet and Facebook. The value gap between the S&P’s tech and financial services companies is at its widest since the dot-com bubble 20 years ago.

Almost all other sectors on the market – energy, industrials, utilities, financial services – have retreated.

Economies in the Western world are in deep recession, and depressions are not out of the question in a few of the weakest countries. The International Monetary Fund expects global GDP to shrink 4.9 per cent in 2020, although more intense pain will be felt in Europe and North America. It expects the economies of France, England and Spain to fall more than 12 per cent, 8 per cent in the United States and 8.4 per cent in Canada.

But all bets are off as COVID-19 infections surge in some countries, notably the U.S., which has recorded 50,000 or more new cases a day in the past week. Some states are suspending or reversing their reopenings. Texas, Florida, California and a few others have closed bars again.

The shutdowns have eliminated millions of jobs and reduced the work hours and incomes of the survivors, triggering collective anxiety attacks about job security that are much worse than the ones during the financial and debt crises of a decade ago. In the U.S. alone, about 22 million jobs were lost in the lockdown. A few million of those have come back, but many more could be lost as small and medium-sized companies go under, while big companies such as Boeing, Airbus, the airlines and the oil companies gut their payrolls as sales vanish and product prices fall. Rystad Energy, a research consultancy, estimated that Texas alone has lost 50,000 oil and gas jobs.

It is difficult to imagine that the tech companies’ rally can continue as the job-wrecking juggernaut trundles over the economic landscape. These companies are so enormous that they are, in effect, the economy – and the economy is in trouble.

Take Apple. Its products sell to the masses, not just the 1 per cent. Europeans, Americans and Canadians love Apple gadgets, but they’re expensive. An iPhone can cost US$1,000. When Americans are lining up by the thousands at food banks for handouts, how much longer will they splurge on new phones when the old ones work perfectly well?

Note that Apple recently introduced a cheap version of the iPhone, known as the SE. More cut-price products are inevitable as consumer buying power evaporates. Apple’s profit margins are more likely to shrink than expand as the crisis endures.

Google and Facebook are in similar positions. They are a digital duopoly, controlling well more than half the market for digital ads (last year, their combined ad market share was estimated by eMarketer at almost 57 per cent). Small companies that rely on online promotions suddenly don’t have a lot of money to spend. Google and Facebook will have to charge less for ads to help keep their clients alive.

Amazon is in a different category. It is becoming the world’s post office. It has no real competitor. And its cloud-computing service, which counts Netflix among its biggest clients, is thriving.

Tesla, for its part, is a mystery. At some point, the low-volume automaker will have to produce sustained and lavish profits to justify its US$225-billion market value. Investors are ignoring the missing profits, focusing instead on the growth story. How much longer they will do so is an open question.

The Big Tech companies have had a fabulous run and have saved the broader equity markets from collapsing. But they can’t keep soaring when the economy that propelled them relentlessly upward before COVID-19 hit is sinking.

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