Sam Hawley: Hi, it’s Sam here. Before we get into today’s episode, just a reminder, we have a listener survey running right now. And thanks to everyone who’s already filled it out. We would love to hear from as many of you as possible about how you’re finding the show. Find it in the show notes or on the website. Just search for ABC News Daily. When do you know you’ve made it? Well, the head of the chipmaking giant Nvidia must have a fair idea. The company’s value topped $5 trillion last week, a milestone that just a few years ago was unthinkable. He’s not alone. Two other tech giants have also hit the $4 trillion mark. So when’s the bust coming? Today, the ABC’s chief business correspondent, Ian Verrender, on whether the AI-fuelled bubble will just keep getting bigger. I’m Sam Hawley on Gadigal land in Sydney. This is ABC News Daily.Ian, I want to talk to you about US tech companies and their crazy high stock prices. But first, why don’t you remind me about The Magnificent Seven? And no, it’s not an Enid Blyton book. Even though it sounds like one and it’ll be a great read, I’m sure. But anyway, who are The Magnificent Seven?
Ian Verrender: Look, these are the companies that… They’re the big artificial intelligence companies, the big, basically, tech companies, really. And they’re not the only ones. There’s a whole raft of companies, particularly in America, that are involved in technology and in artificial intelligence. But these are the ones that investors have really focused on in the past 18 months to two years. And we’re talking about Apple, Nvidia, which nobody had heard of really until about 18 months ago, Microsoft, Amazon, Tesla, Alphabet, which has Google and so forth, and Meta, which is Facebook and Instagram and those kind of things. And they’re the ones that have been really driving growth in the US stock market for the past couple of years. In fact, for quite a while. In fact, I was reading a story last night from 2018 saying this whole technology thing is horribly overvalued. Here we are seven years later saying the same thing. Yeah, right. Anyway, look, they’re now valued at well over 20 trillion US dollars collectively. And that’s more than a third of the S&P 500, which is the top 500 companies in America.
Sam Hawley: Yeah. And Nvidia, its valuation on its own reached five trillion US dollars last week. I mean, incredible.
Ian Verrender: It is. And in fact, it only broke through the four trillion dollar barrier a couple of months ago. And last week, we had two other companies bust through that four trillion dollar valuation just in the past few weeks. We’re talking about Apple and Microsoft.
Sam Hawley: Wow, it is incredible. So, I mean, how on earth do they manage to climb to that level, Ian?
Ian Verrender: Well, all of these valuations are really based upon what investors believe the earnings will be down the track. And so investors are pretty confident that we’re going to see continued earnings growth at a really incredible pace for years to come from these companies. And, you know, and not just from these companies either. All the big AI companies are out there reporting really quite good results. Here’s the thing, though. It is a fundamental difference between now and what happened back in 2000.
News report: It was a Friday meltdown, a plunge that wiped hundreds of billions of dollars off the value of companies worldwide. The most spectacular movement was in the Nasdaq index of high tech stocks. A loss of almost 10 percent overnight and a 25 percent plunge over the week has pushed investors into a bear market.
Ian Verrender: Back in 2000, we had a whole lot of companies simply calling …you tack ‘dot.com’ onto the end of your name and suddenly your company valuation shot through the roof. Most of those companies didn’t earn any money. They didn’t even have any revenue. They were relying on shareholder funds, shareholders, investors just continually tipping in money that they would burn through or borrowing cash or a combination of the two. This time around, we’ve got these very big, very profitable companies that are behind this big infrastructure spend. I mean, it’s massive, the amount of money they’re spending and they’re not doing it from debt. They’re using cash flow. They’re using the money that they’re generating from their businesses to fuel this capital expenditure, this massive investment program that that’s underway at the moment.
Sam Hawley: So investors are what, more secure in the thought that these AI stocks are going to keep going up, that it’s a really good long term investment.
Ian Verrender: That’s what they hope. And look, they might be right. I guess the point I’m trying to make now is that if it if those expectations don’t come to fruition, we’re unlikely to see these companies collapse. We’re more likely to see their share prices contract quite sharply, but not put them into any kind of danger. But, you know, the money they’re spending at the moment, again, it’s not just on pie in the sky kind of, you know, obscure things. They’re spending a lot of money on infrastructure. Artificial intelligence requires massive amounts of data capacity. And so they’re spending money on data centers, which are horribly expensive to to build. And they’re also spending money on advanced equipment for artificial intelligence. They’re actually spending money on hardware, on real goods and software. So there is a real investment boom going on in America at the moment. And in fact, there’s about, I guess, five of those, Magnificent Seven. They account for almost 30 percent of all capital spending in America, in the S&P 500, the Standard & Poor’s 500, the top 500 companies. So it’s a huge amount of money that they’re spending on real services.
Sam Hawley: Yeah. And they really are a driving force behind the US economy, aren’t they?
Ian Verrender: Oh, absolutely. That money is flowing through the US economy. It’s employing people. It’s, you know, involved in building things. And not just the American economy as well. Microsoft just in the past week have signed a 15 billion dollar deal for cloud services. That’s computing cloud services with a Sydney-based company called Iren. This money is starting to flow around the world.
Sam Hawley: Well, Ian, this concentration of wealth, it does, though, have people wondering, doesn’t it, whether or not it can last or whether this rather large bubble might actually burst. So who’s most concerned about that at this point?
Ian Verrender: Well, it’s it’s really strange at the moment. I mean, I think everybody would agree we are in some of the most uncertain times in a century, geopolitically, in terms of wars, in terms of trade. But when it comes to financial markets, there’s almost no acknowledgement of the risks that are built up in the system at the moment. And there are risks everywhere. And I guess one of the big ones is the fact that, you know, is this boom in America for technology stocks? Has it been overdone? You know, are these companies really worth six, seven hundred times what their earnings are? And you’d have to suggest, well, maybe they’re not. And that is where the danger lies. And there’s a lot of people who are concerned. I mean, the Bank of England has come out in the last few weeks. Michele Bullock last week came out, you know, basically saying this could all end in tears.
Michele Bullock: What is it that the markets are so comfortable about? They just think that there’s going to be no bad outcomes here. And I think some people are worried that that might all end in tears.
Ian Verrender: You’ve seen Jamie Dimon, the head of JP Morgan. You’ve seen his counterpart at Goldman Sachs. You’ve seen the head of Citigroup. All of these companies that actually, you know, usually applaud these kind of booms because it means they make more money. They’re sounding the warnings as well as regulators.
Sam Hawley: Yeah. Jamie Dimon, who you mentioned on the BBC, he said the level of uncertainty, it should just really be higher in people’s minds, right?Like get thinking about it.
Jaime Dimon, JPMorgan Chase CEO: I would give it a higher probability than I think is probably priced in the market and by others. So if the market’s pricing in 10 percent, I would price in, I would say it’s more like 30. “A one third chance of a correction.” Yeah. And I’m not saying next year. Because the timing of these things is almost impossible.
Sam Hawley: Well, you know, Nvidia’s boss, Jensen Huang, he’s really downplayed any of these concerns. He was on Bloomberg and he was just saying that, you know, AI tech, it’s just become so useful.
Jensen Huang, Nvidia CEO: I don’t believe we’re in an AI bubble. And the reason for that is we’re going through a natural transition from a old computing model based on general purpose computing to accelerated computing. We also know that AI has now become good enough because of reasoning capability, research capabilities, its ability to think. It’s now generating tokens and now generating intelligence that’s worth paying for.
Ian Verrender: That’s right. It is useful. And the promise it holds is that it might really revolutionise the way we live, the way we work, create a lot of potentially a lot of pain as well. But it might just, you know, fix the flagging productivity problem that most developed nations have.
Sam Hawley: All right. Well, Nvidia’s boss is pretty confident there won’t be a bust. But if there was one, Ian, what would that actually look like? Are we talking about a sort of global financial crisis style event? What would we see?
Ian Verrender: Well, I guess what we would see, there’s two impacts, really. And a lot of people and even our regulators and central banks tend to discriminate or differentiate between the real world, the real world economy and the world of finance. And they’re actually really quite interrelated. So I guess in the first instance, we’d see the share prices collapse. As I said before, the companies aren’t going to go broke because they haven’t been using debt. But we would see their share prices drop quite alarmingly if there was some reckoning. That would then probably curtail their investment programs. So you’d see a lot less money flowing through the economies, the capital expenditure on on investments, on equipment and so forth. But there’s another impact as well, and it’s called the wealth effect. And pretty much everybody now recognises that it’s a real thing. You know, your superannuation balances, for instance, let’s say, you know, you’ve got five hundred thousand dollars in your superannuation account, and it’s all been propped up really by these seven companies, these artificial intelligence companies. You think you’re doing fabulously well. You’re going to be retiring, you know, 10, 20 years down the track, and it’s going to be worth an absolute fortune. And then suddenly it halves in value. You automatically suddenly feel poorer. And as a result of that, you start to slow your spending down. And if that’s a mass event, if everybody starts doing that, that means there’s not as much money flowing through the economy. It means that the economy slows down. It means firms start to lay people off and you can actually induce a recession as a result of that. So that’s the negative wealth effect that can happen. The opposite occurs as well. If you suddenly see your, you know, share portfolio or even your home soar in value, you feel wealthier and you’re more likely to spend.
Sam Hawley: Mm. All right. Well, Ian, a handful of tech companies are now in this position where they control just a huge chunk of the world’s wealth. That’s a really powerful position to be in, isn’t it? Particularly when we’re talking about AI and technology, which can completely change our lives.
Ian Verrender: Yeah. And I mean, look, you know, I think we’ve seen some elections in recent times where those tech companies have provided funding for their preferred politician. And, you know, I think when you saw Donald Trump on the podium after the election being decided, who was in the front row there sitting alongside the cabinet? You had the big tech bosses, all of them sitting there in a row. So Donald Trump clearly understands the power that they wield. As you say, they do control an enormous amount of wealth. And with that wealth comes political power.
Sam Hawley: OK, but if the sky’s the limit and they just keep getting richer, what does that look like for the global economy? Is that OK?
Ian Verrender: Yeah, it’s a difficult question, isn’t it? I mean, it depends how that, you know, if that wealth is overly concentrated, if everybody’s got a slice of it. And let’s be honest, I mean, a lot of Australians now do have a slice of that through our superannuation accounts. But it is worrying when you have a couple of companies that tend to dominate global wealth. I guess it’s nothing unusual. If you go back even centuries, you’ll see that there’s a handful of companies occasionally that do end up in that position. We’ve seen media barons in the past look like that. We’ve seen railroad companies in America take on that task. We’ve seen bankers, individual bankers, big bankers take on those kind of roles where enormous amounts of wealth are really concentrated amongst a very small number of people. It’s not a healthy situation, obviously. And it depends on the ability, I guess, of governments to be able to manage that and to ensure that, you know, you don’t end up in a situation of a feudal overlord there, you know, that’s controlling the economy and making life tough for ordinary people.
Sam Hawley: Ian Verrender is the ABC’s chief business correspondent. This episode was produced by Sydney Pead and Cinnamon Nippard. Audio production by Sam Dunn. Our supervising producer is David Coady. I’m Sam Hawley. Don’t forget about our listener survey. It’s in the show notes or find it on the website. ABC News Daily will be back in a moment. We’ll be back again on Monday. Thanks for listening.