Rebalancing tech stocks may free capital to support real economy
The global financial sector has over-invested in computerized content-generation and under-invested in the paradigm shift to sustainable investment and climate-smart trade.
Let me start by clarifying: I am not a market analyst, and I am not telling you here what to do with your money. I do, however, spend a lot of time thinking through the needed structural evolution of the mainstream economy — partly toward sustainability and partly toward a better balance between labor and capital share of income. If a rising tide lifts all boats, the tide cannot only rise in stock portfolios; it has to rise across the real economy, where people work and earn and spend and live.
In 2024, major technology stocks have surged in valuation, with six companies now valued at more than $1 trillion — three at more than $3 trillion. Fossil fuel stocks have also seen rising profits and stock prices, as the OPEC+ cartel’s market-rigging agreement has played out, and some say Saudi Aramco specifically has driven a distortion of oil company stock pricing. Nearly 200 governments, after all, have agreed the world must “transition away from fossil fuels”. With interest rates high and small-business and consumer lending stretched, fossil fuels are running out of elasticity — meaning: most people and small businesses cannot and will not continue to tolerate cartel-driven energy price inflation.
Add to this the irrational exuberance around “generative AI” — which is not really AI at all. Companies thought to be positioned to cash in on the proliferation of computerized writing and image generation, and other possible uses of the technology, have seen stocks rise so quickly, some are trading at over 30 times their earnings. They may one day — years or decades from now — justify that investment, but the current market trends will hit a ceiling. People cannot keep pouring money into companies that cannot return it or won’t substantiate such levels of investment for many years to come and only then after several waves of losses in the sector.
All of this comes together with the signal from Warren Buffet’s Berkshire Hathaway that it will unload some major stocks to build up its cash reserves. Some have observed this could be seen as a “signal to sell”, which could be one of the triggers of the tech selloff. Others note Buffet’s track record of moving just ahead of markets, by reading the tea leaves with a mix of astute calculation and clearheadedness about what constitutes real-world value.
This is in keeping with Buffet’s long-standing focus on stocks that actually make and successfully sell, distribute, and build market share for their products. In other words, he likes to invest in real businesses, not theoretical ones. This has allowed Berkshire to follow the natural growth of the real economy, rather than getting tossed around on the chaotic tides of faddish speculation. There is reasonable concern that the generative AI craze has led to extreme overvaluation of some tech stocks. It may not be that any of these companies will run into hard times, but the markets will inevitably correct overexposure.
In an economy where interest rates remain high, where consumer lending is tighter, where energy commodity elasticity is reaching its breaking point, and where tech stocks have reached an irrationally high valuation as compared to earnings, the aggressively conscientious investor looks to shift to cash, debt, and physical investments that are less speculative and have, at least for now, a layer of padding. In some ways, the Berkshire news points to something good about the wider economic recovery: shifting away from equities could suggest the current rates of interest will not lead to major financial failures or collapse of consumer-driven sectors.
Stocks will need to find their level, getting closer to a rational — and sustainable — price-to-earnings ratio. (It should be noted, many analysts make room for high P/E ratios when certain signs are there that earnings will grow quickly in coming years.) Meanwhile, banks, small businesses, homeowners, renters, and everyone else, will continue their day to day existence, in an economy where people don’t take in 20 times the cash their actual economic activity warrants.
The question about this selloff is not whether it is a sign of good or bad things to come. It should be a healthy and needed correction of the reckless spending on tech stocks boosted by not-really-AI plans and proposals. And, it could be a moment for the wider financial sector to rebalance toward the mechanics of the everyday economy.
It has been argued that big tech has been siphoning investment away from Main Street and new start-ups, precisely when we need to reinvigorate local economies. Where major public investment in local economies has been keeping banks focused on the everyday economy, building roads, bridges, improved water management systems, and the ingredients of new manufacturing capacity — as in the United States — the selloff might just be a momentary correction.
It is also worth pausing to ask if Japan, where this selloff started, is facing particular difficulties. According to the Financial Times:
Japan’s equities have erased all of their gains for the year following Monday’s plunge, stung by a rapid rise in the yen after the Bank of Japan last week hoisted its main interest rate to 0.25 per cent, the highest level since the global financial crisis in late 2008… A stronger currency is a big headwind for the country’s exporter-heavy stock benchmarks.
The real question about the sudden shockwave of equity selling is: Did this come at the right time, or too late?
- If too late, then we have a problem.
- If it came, however, right when it needed to, to put the brakes on overinvestment in unproven business models linked to computerized content-generation, then there is a chance some of that value shed from stock portfolios will actually end up supporting more local investment of the kind that make economies work for 99% of the population.
When you take all of the numbers together, there is enough real investment in real, everyday economic activity, to suggest that the right-sized correction scenario is the more plausible. It is also true that in 2024, generative AI and OPEC+ are not where most people need to see new investment. What most people need — and will need for generations to come — is for institutions large and small, public, private, and multilateral, to realign their financial priorities with sustainable and climate-resilient business models.
Even with the steady surge in new investment into clean energy technologies, the climate value economy has still not achieved the mainstream status it needs to. We need unprecedented surges of new investment in clean tech, regenerative and agroecological food systems, in climate risk reduction and resilience-building, and in climate-smart trade. Each of these areas offers real-world returns on investment that far outweigh the handful of major tech stocks hoarding new investment in the generative AI arms race.
For example: unhealthy, unsustainable food systems are costing us in excess of $10 trillion in economic and financial waste every year. Climate-related pressures — including disaster response and regional destabilization — have pushed dozens of countries into debt distress. That is a global economic, fiscal, and security time-bomb — potentially pulling in tens of trillions of dollars in at-risk capital — that needs to be resolved equitably, constructively, creatively, and quickly. New investment scenarios will follow.
The opportunities inherent in addressing these massive challenges through innovation, sustainable development, and multilayered cross-sector co-investment, are unprecedented. The world needs to move away from the arms race in fake content generation towards a cooperative innovation surge in sustainable future-building. Nothing could be more important, or a wiser use of capital, industrial capacity, and talent.
