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- [00:00]
PGM Representative
At pjum, we actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most. From geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long term goals. Pjum, our investments shape tomorrow today.
- [00:36]
Katie Martin
Pushkin, when you talk about American exceptionalism in markets, do you know what you're really talking about? Tech. Big tech. Huge tech. Tech stocks are the US Stock market and the US Stock market is. Is tech now. That's great. Probably has been for years. Anyway, these tech monsters have made boatloads of money and become more and more important for how the overall market performs. But what if this is, first of all, really unhealthy and second of all, kind of running out of steam? The latest big AI release from OpenAI, the boffins behind ChatGPT, was a bit meh. And suddenly people are getting some sneaking doubts. So today on the show, we're asking, is it time to concentrate on concentration? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist down in the basement of FT Towers, and I'm joined down the line by that scoundrel Rob Armstrong, who writes whole articles about why men should wear shorts at work and then does not wear shorts at work himself.
- [01:50]
Rob Armstrong
Is it possible to have a successful podcast where the theme word, the word we keep coming back to is meh meh? Is that really a successful media strategy, Katie? I don't think so. I think we need a spicier catchphrase than meh.
- [02:06]
Katie Martin
I'm not sure our marketing people would really go for meh, but whatever meh it is. Now, I gather you are in a rustic cabin somewhere. What's going on with that?
- [02:20]
Rob Armstrong
Yes, I am in a cabin which is in the backyard of my mother in law's house in scenic Shelter Island, New York. I can just about see a swimming pool from where I sit here. So life is good.
- [02:33]
Katie Martin
Lovely. Good times. Good times. So Rob, from your cabin in the woods, you wrote about this the other day in the Unhedged newsletter. It was all tech, techy, techie, tech, tech, tech. Shoot me some stats to tell the class. What are we dealing with here? How big is this techie tech?
- [02:51]
Rob Armstrong
Well, let's talk about the top 10 stocks by market cap in America. Right now they are in descending order of size. Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta, Broadcom, Tesla, Berkshire Hathaway and JP Morgan Chase. And clever listeners will have noticed, that is eight tech companies and two finance companies. Yes, and that tells you how tech oriented this market is. And those 10 stocks, here are some stats. They're 40% of the value of the S&P 500. That's market cap.
- [03:34]
Katie Martin
It was like 36 not so long ago. Right.
- [03:37]
Rob Armstrong
So I know. Even bigger since April, they've just been hammering. They account for 56% of the gains in the index since the market bottomed on April 8th after Liberation Day. They account for about a third of the revenue growth in the last year in the index, about half or a bit more than half of the net income growth and even more than half of of the capital expenditure growth. So not only are they loads of the value, they're contributing loads of the growth in a lot of key categories. They are kind of keeping the index afloat, growth wise.
- [04:19]
Katie Martin
Now, we've spoken about this before and you've written about this before, but it's really hard to figure out whether this is something we need to worry about or not. As long as these companies are in aggregate making boatloads of money, then who cares?
- [04:33]
Rob Armstrong
Yes, that is a good point. And something we know as a historical fact is that is always the case that in the stock market a relatively small number of companies account for a massive amount of the gains. That is always historically true. It's just somewhat more true at certain times than others. The reason to worry, I guess, is there is an uncomfortable historical pattern. So in 2000, we had a very concentrated stock market in the same way a few companies accounted for a lot of the value. And you and I are, or at least I, I will say politely and old enough to remember that things turned out badly in 2000. And I was just looking today at the last huge spike in concentration before that, which was like around 1973, which I am not old enough to remember. And that big spike in concentration was also followed by a big decline in the stock market. So although you don't kind of know the direction of causality or what to make of it all, there is this unpleasant pattern that we have to reckon with. And maybe it's sort of that when stock markets get concentrated is when hype is kind of at its peak. Right. That people are all jumping on the same narrative. Everybody's on the FOMO train and bad things happen sooner or later. Yes, but why would bad things happen now? That's a different question.
- [06:09]
Katie Martin
Well, yeah, so sometimes when people feel uncomfortable with the fact that us Stock markets are doing well. This is just kind of a thing that they pull off the shelf to say here's a thing we could worry about. But it's not necessarily the case, as you were saying, that you do need to worry about it. So there's this huge great big document that comes out every year. It's the UBS Investment Returns Handbook. I literally have a copy of it on my desk. It's a monster of a thing. It's like loads of data going Back to like 1900 about markets used to.
- [06:40]
Rob Armstrong
Be the Credit Suisse Returns Handbook, which is a story in itself.
- [06:45]
Katie Martin
That's a whole other story. But my point is like they did some work on concentration back earlier this year when, when that report came out. And levels of concentration in Swiss stock markets and Taiwanese stock markets and loads of different stock markets is much higher actually than it is in the U.S. the thing is, the U.S. you know, everything's bigger in America. Everybody, they've taken this thing and you run with it. Which is why we've got this situation where Nvidia is worth more than 4,4 trillion of your US dollars. Like it's, it's globally significant. It's not just significant for the US in and of itself, if you see what I mean.
- [07:23]
Rob Armstrong
I mean, one worry is just that these big companies, these big tech companies, they're growing so fast now and trees don't grow to the sky. You can have a general worry about kind of reversion to the mean. These things kind of grow revenues at 15% and earnings at 20% or whatever it is. Maybe it's 10 and 20. And what if that just slows down because there's competition? This is how economies are supposed to work, et cetera, et cetera. But there is one reason not to worry about that. And the reason not to worry about reversion to the mean is called Microsoft. So I did this chart of the top 10 stocks in the S&P 500 every five years going back to 1995.
- [08:14]
Katie Martin
Yeah.
- [08:14]
Rob Armstrong
And one stock appears in the top 10 in each of those periods and it's Microsoft. And the point I'm suggesting there is just if you get one of these kind of network effect driven tech pseudo monopolies or oligopolies, they can really grow for a long time. So you look at the Apples and the Amazons and the Microsofts and the metas, they might endure the way Microsoft has endured for 30 years. That's the optimistic take on the situation.
- [08:49]
Katie Martin
I would say the pessimistic take is you can Find any number which is.
- [08:54]
Rob Armstrong
Always count on Katie Martin to make.
- [08:58]
Katie Martin
I don't count myself among those who are tech savvy enough to really be able to pick apart what AI can and can't do. But I know there's a lot of commentators out there who are like, this thing does not make sense. This technology is like an elaborate speak and spell and it doesn't do a lot of the things that we think it does. So there was this new release of AI technology from OpenAI, this GPT5, and the reviews were not great. Users were like, there's loads of errors that are creeping in. And I don't like the new tone that this machine is taking. And it sort of lost some of its personality and, and the company was like kind of rushing to fix some bits and keep the users happy. And it's just led to this idea that, huh, maybe this isn't the completely transformative technology that these very special boys tell us it is. Maybe this is just a tech tool. But you know, again, like our colleague Janan Ganesh was writing about this the other day that, you know, the tech Bros will tell you this is the most transformative technology you've ever seen. This is like reinventing the wheel. This is a whole new industrial revolution. And it's like, is it though, or is it like a kind of word recognition pattern thing?
- [10:13]
Rob Armstrong
Is it merely the equivalent of the Internet to listen to these guys talk? It's like the wheel or plumbing or electric lights. Right. Maybe it's just as big as the Internet, which was a huge thing, I'd like to note. But wasn't the industrial revolution? I think that was Janan's point. A lot of people are articulating this in terms of the rate of improvement. There was this idea that this thing would just improve itself at an incredible rate until it became a super intelligence.
- [10:47]
Katie Martin
Right.
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Rob Armstrong
And the gains in its ability to do things, to listen to some people, might be slowing down a little bit. Meaning that the technology has reached some kind of limit. Before it became the one massive brain in the sky that knows everything.
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Katie Martin
Yeah.
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Rob Armstrong
Now, the first issue we would face, if AI does disappoint, either as a technology or, by the way, as a business, there's another question about whether, however good the technology is, how profitable the industry turns out to be, what the competitive dynamics are. But if AI fails on either front, the first casualty is going to be the most valuable company ever, which is Nvidia right now at $4.4 trillion. And you know, if, if that stock falls, I Don't know. A third a trillion dollars has just gone to money heaven. That is a bit of a problem.
- [11:47]
Katie Martin
It's gone to the big shredding machine in the sky. Yeah, that's the thing, isn't it? So if this goes belly up, and again, I'm just not enough of a nerd to be able to tell you whether it will or not, but if it goes belly up, that's not just a, oh look, we've got a technology issue here that's potentially a financial crisis, right? Because yes, it occupies such a big slice of the world's most important stock market. And again, as you were pointing out in your newsletter the other day, I think it was, you might have been a cleverer colleague somewhere. But point is, AI accounts for a third of total global venture capital investment this year. So. So there's a lot of private equity money, there's a lot of private credit money, there's a lot of public market money that's all tied up in this one thing. And if one, that one thing goes wrong, then ruh ro, we're in trouble.
- [12:47]
Rob Armstrong
And it would not only wipe a huge amount of value off of Nvidia, a lot of the growth that is embedded in the price of Microsoft, Amazon, Alphabet, Meta, Broadcom, those growth rates would have to be marked down and that would mean the stock prices would have to fall. Now, in an attempt to be optimistic because I'm such a naturally sunny person, let me say this. Microsoft, Apple, Amazon, Meta Broadcom, these companies all have good core businesses that are not AI. So what would not happen is that the big tech companies current earnings would not collapse. And that is a very important distinction between what's happening now with these companies and what happened to pets.com in 2000 or whatever, whatever.combust business you want to mention is that those businesses were not supported by earnings in the same way that our big tech companies now are.
- [13:52]
Katie Martin
I almost think it's a shame that like pets.com is the kind of prime example that's always brought up of like ridiculous Internet companies that never went anywhere back in 99, 2000. But the tagline, the logo for pets.com back in the day was I believe because pets can't drive, which I think is kind of glorious. Pets can't drive. It's just a fact.
- [14:15]
Rob Armstrong
And notice that there is quite a successful Internet driven business now called Chewy. So your point, which is very salient, is we need to find a dumber example of what happened in 2000, which I'm sure are there and we, we'll have our research team get on that topic.
- [14:32]
Katie Martin
There was, there was stupid stuff. There were lots of stocks out there, there that were trading at a price to earnings ratio of like 85 times. Whereas now a lot of these whiz bang tech stocks, some of them are trading at, you know, maybe 30, 40 times, which, don't get me wrong, is crazy money, but it's not super loopy, totally ridiculous money. But I guess the overriding scary message here is that investors have all, effectively all of their eggs in one basket. So, you know, again, going back to your newsletter, like over the years, that kind of top 10 of big companies has always been a mishmash of like industrial companies, energy companies, a bit of tech, a bit of pharmaceuticals, a bit of consumer staples. Now the list from 1 to 10 for sectors goes as follows. Tech, tech, tech, tech, tech, tech, tech, tech, tech, finance, finance. What could be better than tech and finance as long as you, you know.
- [15:30]
Rob Armstrong
Whereas, I mean, and I was fascinated to see what it was in 95, what a mix it was. General Electric was number one. So industrials number two, oil, Coca Cola number three, consumer staples, IBM tech, Merck, pharmaceuticals. And down the list like that. The economy wasn't more diversified then, but the stock market was more diversified.
- [15:52]
Katie Martin
Are you picking up a kind of vibe shift at all in terms of the tone that people that you speak to are using to talk about this stuff? You know, are investors picking up the phone to you and saying, you know what, I'm more worried than I was six months ago?
- [16:08]
Rob Armstrong
No, it would be reassuring if you were.
- [16:12]
PGM Representative
Yes.
- [16:12]
Rob Armstrong
Markets that go up are markets that people worry about. Right. That, you know, you have to have somebody who's on the fence who then jumps in and that's what drives the market up right now. The tone seems to be earnings are good, the fundamentals are in place, the economy is chugging along, the American consumer is chugging along, as the latest retail sales report reflected. And tariffs aren't as bad as we thought and are kind of stabilizing. So the narrative is quite positive right now and for a lot of reasons, probably rightly so, the tone is optimistic. Are you finding anything different from that, Katie?
- [16:53]
Katie Martin
Maybe a little bit more of the kind of. Even the people, you know, the analysts and whatever that are sort of big on AI are saying, look, it's worth taking out some hedges and diversifying a little bit and just, you know, being a little bit careful here just because valuations are getting a little bit toppy. I'm not hearing that many People other than the people who've always hated tech and will go to their graves hating tech, saying this is awful and it's going to. And it's going to die soon. But as you say, like, there are reasons to be positive. And on top of that, we might get a cut in interest rates in the states as soon as next month.
- [17:30]
Rob Armstrong
Yes, and we might get a big fat hint about that on Friday from Wyoming, where the chair of the Fed is speaking. And that is really, I guess I should have mentioned that, that the cutting narrative has come in and is now dominating even the tech narrative. The idea finally we're going to get interest rate cuts. That is a potent combination. A concentrated market driven by tech with a lot of hype about a technology. And then you have the idea that the Fed at the same time is going to run in and we're going to get interest rate cuts.
- [18:03]
Katie Martin
So maybe we should just shut the hell up, stop worrying. Learn to love it. Everything is awesome.
- [18:12]
Rob Armstrong
Learn to love the tech.
- [18:13]
Katie Martin
Yes, that is the message, the mindset we want to take as we go into a small break and then go into Long Short.
- [18:24]
PGM Representative
Bonds are back and so is all the credit. PGym Fixed Income's monthly podcast series. From the latest trends to long term perspectives, you'll get timely fixed income insights from leading economists, research analysts and investment professionals. Whether you're new to bonds or a seasoned investor, tune in to all the credit wherever you get your podcasts. This podcast is intended solely for professional investor use. Past performance is not a guarantee of future results.
- [18:53]
Katie Martin
Okey doke. Now it's time for Long Short. That part of the show where we go long a thing we love or short a thing we hate. Rob, what you say?
- [19:02]
Rob Armstrong
I'm going to be long defensive stocks. I was looking at this in the newsletter the other day.
- [19:07]
Katie Martin
Defensive or defense?
- [19:10]
Rob Armstrong
Defensive. So I was looking the other day at these traditional kind of hide under the table sectors like healthcare, consumer staples, utilities, and they have performed abysmally. And as a cheap New Englander, I am always attracted to anything that is on sale and you know, reversion to the mean always appeals to me. But I just feel like in an expensive market, this is where the neglected stories are. Healthcare especially, which has been very hated because of the political overhang. And I just think it might be time to rummage around in the bargain bin in defensives.
- [19:50]
Katie Martin
Okay, okay, I'll allow that. So I am also long. I love this. Kiruna, a mining town tucked inside the Arctic Circle in northern Sweden where the the authorities are moving an entire church across town. So they've put this gigantic church on wheels and they're trekking it across town really, really slowly and brilliantly. It's being live streamed and I've had it on my screen like all day. I'm fully into it. And they've made it into a whole like beautiful kind of civic event. There are choirs, there are like kids buzzing around on bikes talking to the TV people. There are like people wearing mittens. It looks like it might be slightly snowing and it's quite beautiful. So I'm really into this church on wheels.
- [20:42]
Rob Armstrong
Sounds like a road trip for the Unhedged podcast.
- [20:46]
Katie Martin
So we could go up there, talk about iron ore and mobile churches. It's an idea. Let's. Let's put a pin in it, as people say. Listeners, we are going to be back in your ears on Thursday, so listen up then and in the meantime, watch this live stream. It's actually surprisingly entertaining. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of audio. Special thanks to Laura Clark, Alasdair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening, Sam.