Winning the Triple Crown

It’s extremely difficult to win the Triple Crown in Thoroughbred Racing. Only 13 horses have done it with the first being in 1919. Needless to say, it’s rare and seems to be a rather appropriate analogy for looking back at big name tech over the past 15 years.

Indexes are overly concentrated in these names but it’s been for good reason. Let’s take a look why –

Win #1 – Market Domination

Technology, generally speaking is finding its way into our lives more and more. You can even have a “smart” refrigerator these days. Demand for semiconductors has exploded in the last decade. Cloud computing, cybersecurity, fintech, smartphones, … from a sector standpoint, it’s hard to deny the broad innovation we have seen. But even more specifically, the domination of some companies like the FAANGs have created quasi-monopolies in their respective industries. Such success has historically been rewarded by higher stock prices and that has been the case now.

Win #2 – Liquidity Injection

In the aftermath of the GFC, the Fed was desperate to stimulate the economy. The unorthodox monetary policies kept interest rates abnormally low for an abnormally long time even as the economy recovered. Growth was not too hot nor too cold and created a Goldilocks situation for investors. With stimulus spickets on already (and multiplied by a factor of 100 during the pandemic), a tidal wave of money found its way into the market and boosted big tech further. The rising tide lifting all boats.

Win #3 – The Promise of Ai

More recently, just as concentration and valuation concerns started affecting the invincibility narrative of these companies, an innovative breakthrough with Ai created another reason to plow money into these same names. After all, these market leaders have the cash and products to deploy and integrate this new technology with the promise of raising productivity to the next level.

As the chart shows, the rise in earnings expectations has been all in tech, leaving the rest of the market behind. Many argue we are in the early stages of a new “expansion”. If so, it would be the first ever starting from historically low unemployment. (expansions start from a peak in unemployment)

So we should see a closing of that gap as broader earnings pick up. If not, be wary of a multiple contraction on top of a pullback in tech earnings expectations if the exuberance doesn’t translate into reality.