It is not usual for the Bank of Spain to focus on an economic sector over which it does not exercise any type of direct supervision. Even less if this sector has little or no presence in Spain. However, it has just done so with the American technology sector, due to the high weight that the giants of this industry have on the stock markets and the effect that this can have on a global scale if their prices fall . He actually compares this possible scenario to the bursting of the dotcom bubble at the turn of the century.
The Spanish supervisor is primarily focused on the big seven tech companies in the United States – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – and the ripple effect they can have. It indicates its weight in the main indices. For example, in the S&P 500, they can reach 45%. This index has appreciated by 132% since 2019. If we only look at the progression of the technological Nasdaq, the surge was 220% over the same five years.
The Bank of Spain compares this to what happened twenty years ago. Between 1996 and 2000, the S&P 500 rose 147% and the Nasdaq rose 716%. Then “sharp” corrections occurred because the stock market valuations of these companies “were not sustainable” and this overtook the stock market. The impact was “relatively contained” on the US economy due to the sector’s low level of debt, the banks’ limited exposure and the fact that the shares were primarily in the hands of high-income earners. Despite this, the United States experienced a “mild recession” between March and November 2021 and the contagion effect spread to Europe, where a “significant economic slowdown” occurred.
If this happened with the “dotcoms”, now the big technology companies are different, because they are larger and more consolidated companies, “with high network economies” and “the ability to personalize their products, which makes their tendency to concentrate very intense.” » explains the Bank of Spain. This also has a negative side, because this concentration “increases the potential systemic impact of the materialization of risks”. He cites, for example, that Apple, Microsoft and Nvidia currently represent about 20% of the S&P 500 index, much higher than the value recorded by the three largest technology companies at the height of the bubble in the 2000s. »
The risks of “technology”
The Bank of Spain does not say that there is currently a bubble in the valuation of technology companies. However, he underlines that “the current high level of technology stock market prices presents risks of sudden corrections” and mentions various risks which could lead to a downward revision of their stock market valuations. Among them, he mentions that the profits of technology companies are not increasing at the rate expected by investors, because we already perceive that stocks “show great sensitivity to the publication of economic results”.
This is what happened to chip manufacturer ASML, which plunged 15.6% a few weeks ago after presenting less positive figures than expected. The same thing happened in February and October 2022 when Meta fell 26% and 24% after releasing its financial numbers. Other risks mentioned by the Spanish supervisor concern possible regulatory changes, problems linked to global supply chains, such as those encountered in recent years, and which may be repeated in a context of “strong geopolitical tensions and trade conflicts “.
He also cites as possible risks that these are companies that are very intensive in the use of energy and that the stock prices of technology companies are “very sensitive to changes in the macrofinancial environment”, because they are securities on which the expectation of profits weighs. strongly in the future. “Weaker than expected economic growth or higher than expected inflation” which leads to an increase in interest rates “could have a negative differential effect on stock prices in this sector,” he concludes. However, it is not easy to witness a deterioration in the credit quality of these companies, as they have a high level of liquidity on their balance sheets.
Investment funds, the most exposed
From there, the Bank of Spain lists those who would be hit hardest, among shareholders and investors. Not just those directly exposed to these actions, because the effect of a correction would be broad. “The fall in share prices could spread to other companies and other markets, particularly in Europe,” due to a possible “acceleration in grocery sales.”
If we break down the ownership structure of technology companies, more than 54% of the securities are in the hands of investment funds and almost 30% in the hands of minorities, notably individual investors and, mainly, Americans. In other words, the funds would be much more exposed to a stock market failure of these companies, which would be contained in the case of banks and even more so in European banks.
However, “the potential amplification effects via investment funds could be comparatively greater, given the high number of shares held by these intermediaries,” he warns. “Although the largest effects would likely occur in the United States, given the strong interconnection between financial markets, significant impacts would also be expected globally,” he summarizes.
