US stock markets are surfing new highs as better-than-forecast results from technology giants are boosting gains across the sector. Although stronger economic growth in the US and globally has given rise to increased business confidence across the board, it’s estimated that a quarter of the S&P 500’s record-breaking return this year is down to a handful of over-performing tech stars.
The S&P 500’s gains put the index firmly on track to record its 104th month in a bull market. In fact, the price-to-earnings ratio of the US stock market hasn’t been this high since the dotcom bubble of the 1990s. And while there are no signs of an imminent crash, it’s a scenario that’s making some investors nervous.
Tech giants leading the charge
Amazon, Microsoft, Intel and Alphabet collectively added almost $150 billion to their market cap after reporting earnings that topped previous forecasts.
Amazon’s third quarter revenues were up 34% to $43.7 billion, helped by its recent purchase of Whole Foods, while Microsoft saw a 12% rise in revenues to $24.5 billion, $1 billion better than expected. Google parent, Alphabet, saw revenues jump 24% to $27.8 billion, in the wake of strong performances from Google and YouTube.
Changing guard at the top of the money tree
The hike in Amazon’s share price enabled CEO Jeff Bezos to overtake Microsoft founder Bill Gates as the world’s richest man. Bezos occupied the top spot – albeit briefly – earlier this year, thanks to a temporary spike in company share prices, but this move could make his crown a more permanent fixture, especially as Gates is determined to shed his wealth, thanks to a succession of philanthropic endeavours.
The dominance of tech – especially in the retail space – is putting downward pressure on older retailers reliant on physical stores. The ‘Amazon effect’ was graphically demonstrated by news of a profit warning from department store JC Penney, whose shares dropped on the announcement that it no longer expected an increase in full-year sales.
Microsoft, meanwhile, can credit an upturn in its commercial cloud business for better-than-expected results that offset flagging Windows software sales. As a result, the stock posted its biggest one-day gain since October 2015. Microchip maker Intel, up 5% after its results, also contributed to the good-news earnings bump.
Where to next for tech?
The growth and earnings potential of the tech giants seems to be unstoppable and, to date, there has been little public pressure or political will to challenge the dominance of these companies. However, they are starting to attract greater scrutiny from regulators as they begin to approach near-monopoly status in some commercial areas.
Only this year, EU antitrust regulators fined Google €2.4 billion for unfairly manipulating search results to benefit its own shopping platform, while the European Commission levied a €250 million fine against Amazon for receiving what amounted to illegal state aid from Luxembourg in the form of a ‘sweetheart’ deal. Questions are also being asked about Facebook and Google’s culpability in the proliferation of ‘fake news’, especially in the run-up to the US election.
Governments in the US and Europe have so far allowed Silicon Valley to regulate itself to a large extent. But as the fair collection of taxes becomes a political hot potato – especially in Europe – and issues around monopolies and online privacy gain ground, it might not be plain sailing for tech mavericks in the future.