The Sunday Drive - 06/16/2024 Edition [#115]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends,
Greetings from Saratoga Springs, NY. To all the dads reading this, Happy Father’s Day!
Now, let’s enjoy a leisurely Father’s Day Drive around the Internet.
🎶 Vibin'
I was away on business most of this past week, something that is much more rare for me than it was back when I was in the corporate world. I really enjoyed getting together and bonding with colleagues, but I can’t begin to tell you how much I missed my family while I was traveling. Spending time with them is what makes being a husband and father worth everything.
So this week I’m vibin’ to I Don’t Want to Miss a Thing by Aerosmith from the soundtrack to the 1998 film, Armageddon.
💭 Quote of the Week
📈 Chart of the Week
This week’s chart depicts the constituents of the S&P 500 index, sized by market cap. The top heavy nature of the index is a direct result of the rapid growth of the largest companies, who continue to grow ever larger.
Some would argue that this big get bigger dynamic is driven by passive flows into the index. There are plenty of folks wringing their hands and worrying that when the next recession inevitably(?) occurs, and the labor market weakens and unemployment rises, there will be a slowdown in contributions to 401(k)s and the like. Then the passive party of flows into the market cap weighted S&P 500 will come to a glass-breaking, heart wrenching, Armageddon feeling end. There is some logic to this.
But…
I think there is a larger dynamic at play here, one that bears consideration. One could argue that these mega-tech companies have earned their place at the top of the heap. Not only have they grown rapidly, they’ve done so while becoming increasingly profitable, thereby deserving of their P/E multiples.
As these companies grow and generate significant free cash flow, they can use that cash to buy back their shares in the open market, shrinking the supply of those shares, driving up their stock price and driving down their cost of capital, certainly on a relative basis as compared to other less profitable companies.
There is a recursive element to this lower cost of capital whereby the companies are relatively advantaged and can grow by acquisition, reinforcing and reinvigorating their earnings growth, and thus their P/E multiples.
This will not go on forever. Trees don’t grow to the sky. This growth cycle will slow at some point. It must.
However, as we’ve discussed before, the profitability of the mega-tech companies is a meaningful differentiator from the market leaders of the tech bubble of the late 1990s. So when these companies’ growth does slow, if only from the law of large numbers, rather than a crash and burn bear market, the result could turn out to be an extended pause in their performance while other, more attractively valued stocks catch up.
🚙 Interesting Drive-By's
🤔 The Hardening of the Great Softening - from Kyle Harrison’s Investing 101 [Link]
Miles to go before we sleep.
💡 Apple’s AI Evolution - from Evan Armstrong’s Napkin Math [Link]
Built-in AI, Supercharged Siri, and Ecosystem Lock-in
💰 Regret Porn - from Kyle Harrison (a two-fer!) [Link]
You can either run from it, or… learn from it!
😵💫 Girlfriends, Inc. - from Alberto Romero’s The Algorithmic Bridge [Link]
Tech companies destroyed teens’ mental and social health with addictive algorithms and want now to fix their misdeeds by giving them… addictive algorithms.
🤓 Be Like Ike - from Doomberg [Link]
Serving as the Supreme Commander of the Allied Expeditionary Force during World War II, General Dwight D. Eisenhower became intimately familiar with German infrastructure and logistics. He was impressed by the effectiveness of the Autobahn highway system in facilitating the rapid movement of civilians and military personnel alike. As the Allies captured more German territory, they leveraged that system to enhance their mobility, and the general’s experience there would forever alter the course of US economic development.
👋🏼 Parting Thought
How many dads can relate?
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em (X ‘em?) at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed. The views expressed in The Sunday Drive are mine alone, and are not necessarily the views of Investment Research Partners or Cache Financials.
I hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mike
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