The “meteoric” rise of Big Tech companies’ share valuations poses a risk to the global economy and threatens far-reaching consequences for savers and investors, economists have warned.
Experts have already raised a looming, economic Cold War as a threat with world trade dividing into blocs and trillions of dollars worth of lost output put at risk. Others acknowledge wars in Ukraine and the Middle East as well as tensions between the US and China over Taiwan as threats to global growth, but the dominance of Big Tech companies has largely gone under the radar.
Professor Konstantinos Stathopoulos, Chair in Accounting and Finance at Alliance Manchester Business School, University of Manchester, said Big Tech’s dominance poses a risk to the global economy.
He told articulate.co.uk: “The meteoric rise of Big Tech valuations in recent years has created an unprecedented concentration of wealth and influence within a handful of tech behemoths that could potentially create systemic risks.
“The interconnected nature of the global economy means disruptions in one sector can reverberate across others.
“A downturn in the tech industry, given its significant contribution to overall market capitalisation, could have far-reaching consequences, affecting investors and industries dependent on tech services and products.”
Professor Stathopoulos said companies such as Apple, Amazon and Alphabet have seen their market capitalisations surge to unprecedented levels, driven by robust revenue streams, strategic acquisitions and an ever-expanding user base.
According to Andrea Calef, Lecturer in Economics at the University of East Anglia, the varied performance of the FTSE100 and S&P500 over the year to date highlights the risk Big Tech presents to global financial stability.
While the FTSE100 has seen flat net returns of 1.3 percent, the S&P500 experienced remarkable returns of 22.9 percent. Calef said while this difference may result from economic structures, policies and political tensions, the composition of the two stock market indices is largely overlooked.
She told articulate.co.uk that unlike the FTSE100, the main US index has been increasingly dominated by the “Magnificent Seven” technology companies: Amazon, Apple, Google, Meta, Microsoft, Nvidia and Tesla.
Calef explained those seven companies currently represent almost 30 percent of the S&P 500, meaning a saver who buys a stake in a fund tracking that index will see 30 percent of that stake allocated to just those seven companies. This makes their portfolio less diversified and so “more prone to risk” associated with those individual stocks.
She said if the Big Tech giants are discounted, then the remaining “S&P 493” index has seen less spectacular, though less volatile, net returns over the last 10 years. This is caused by their valuation relative to the “Magnificent Seven”, according to Calef.
The expert added: “The reality is if BigTech substantially fall, stock market indices may easily dip and many investors (small savers, pension funds, endowments, etc) would suffer losses.”
She said the only gainers in such a scenario would be those short-selling securities with the aim of buying them back at a lower price, adding that if a drop in sales and prices spooks the market, then financial stability would be put at risk.
If panic selling were to ensue, then equity markets around the world would be hit while the impact on bond markets would be unclear.
Calef said in such a situation it would be most likely central banks will intervene in attempts to restore confidence in the markets.
Professor Stathopoulos added: “[T]he challenge lies in discerning whether these (Big Tech) valuations are rooted in the intrinsic value of the companies or if they are inflated by speculative fervour or even a ‘flight to safety’ by investors looking for safe bets in equity markets during years of very low-interest rates.”
But he warned Big Tech may pose a “systemic or systematic” risk not because of its valuations but due to its use of the “unprecedented” levels of capital at its disposal.
The Editor-in-Chief of Corporate Governance: An International Review pointed to Microsoft’s $10bn investment in OpenAI as a sign of an “arms race” over Artificial Intelligence which could guide to “uncontrollable” developments given the “enormous” financial resources at Big Tech’s disposal.
