Silicon Valley Legal Bible(27)the Seven Sisters of the US Stock Market
"The Magnificent Seven" is the hottest keyword in the stock market in the past one or two years. After the bleak stock market in 2022 set a historical record that has not been seen in a century, the US stock market has achieved an amazing turnaround in 2023 with seven stocks: MSFT.US, GOOGL.US, AMZN.US, META.US, AAPL.US, TSLA.US and NVDA.US. The entire US stock market accounts for half of the market value of the world's stock market, and these seven companies account for a quarter of the US stock market. The market value of any one of them can compete with the top ten countries in GDP, which is truly a demonstration of what it means to be rich enough to rival a country.
So, what made the Seven Sisters so prosperous amid the depression? Is the unprecedented concentration of the stock market a blessing or a curse for economic development? Is there still room for startups to survive under the pressure of giant companies? Today, let's take a look at the "Seven Sisters of US Stocks".
Silicon Valley Treasure Book 42 Chapters, a legal encyclopedia tailored for founders. I am Liu Xiaoxiao, an American lawyer, and I will provide you with an in-depth interpretation of the legal logic behind entrepreneurship in Silicon Valley.
1. The Seven Sisters of the US stock market broke the record of consecutive gains set in 1972
Let’s first take a look at the trend chart of the S&P 500 index over the past five years.
After reaching its peak in 2021 due to massive money printing during the epidemic, the stock market was bleak in 2022.
Then, the Seven Sisters of the US Stock Market achieved two major victories in 2023 and 2024 respectively:
a. The first is that in 2023, when the average return rate of the S&P 500 index was only 24%, the average return rate of the stocks of these seven technology companies was 111%. These seven companies also contributed two-thirds of the increase in the S&P 500 index.
b. The second is in 2024, when the S&P 500 index climbed to an all-time high of 5026 points overnight after a significant short squeeze, and achieved positive returns in 14 of the past 15 weeks. This achievement is the most significant continuous upward performance since half a century since 1972, and the most important driving factor is also these seven sisters.
All of this has forced people to focus on these seven stocks. Bank of America analyst Michael Hartnett created the concept of "Magnificent Seven" for these seven technology companies. The name was borrowed from the movie of the same name in the 1960s. Some translations are "Seven Sisters" and some are "Seven Giants". "Magnificent Seven" refers to seven outstanding US technology giant stocks, including MSFT.US, GOOGL.US, AMZN.US, META.US, AAPL.US, TSLA.US and NVDA.US.
Regarding the financial data analysis of these seven stocks, major financial bloggers have made more comprehensive analyses than I have. In today's program, we want to explore more of a trend-based thinking.
2. From FLAG to Seven Sisters
In fact, the Seven Sisters of the U.S. stock market is not the first time that such an idol group has appeared in the history of the U.S. stock market.
In the impression of our generation born in the 1980s and 1990s, the first large company that appeared in a group should be Facebook, LinkedIn, Amazon, Google. At that time, this group appeared mainly because these four companies had high salaries and were the most popular among fresh graduates in the job market.
But soon after, Netflix replaced LinkedIn's position, and the combination of these four companies changed from FLAG (Facebook, LinkedIn, Amazon, Google) to FANG (Facebook, Amazon, Netflix and Google). At the same time, people found that these large companies not only had high recruitment salaries, but also had steady and strong stock price growth. Therefore, these four companies also changed from popular job-seeking companies to a synonym for giant technology growth stocks.
Later, the concept of FANG (Facebook, Amazon, Netflix and Google) was expanded to FAANG (Facebook, Amazon, Apple, Netflix and Google), which added Apple.
In the following years of the epidemic, people gradually stopped mentioning these concepts. When the concept of this combination entered the public eye again, it was the Seven Sisters who rebounded from the bottom after the epidemic and performed amazingly.
But what is different is that
a. total market value of the four companies in 2012 was $480.37 billion, and the total market value of US stocks was $18.67 trillion, accounting for 2.57%
b.Next, in 2013, the total market value of the four FANG companies was $1.076 trillion, and the total market value of US stocks was $23 trillion, accounting for 4.68%
c. In 2017, the total market value of the five FAANG companies was $2.83 trillion, and the total market value of US stocks was $31.77 trillion, accounting for 8.91%
d. The total market value of the Magnificent Seven companies in 2023 is $11.848 trillion, and the total market value of US stocks is $46.2 trillion, accounting for 25.65%
In just ten years, a few companies in the first tier have gone from accounting for only 2% of the entire U.S. stock market to a quarter of the entire U.S. stock market, and the stock market has reached an unprecedented level of concentration.
3. The prosperity of the Seven Sisters of the US stock market and the bleakness of start-ups
On one hand, the seven sisters of the US stock market are making a lot of money, while on the other hand, start-ups are struggling to survive. As a venture capital lawyer for start-ups, I have witnessed the tragic financing of start-ups from 2023 to 2024. It can be said that some are happy while others are sad.
So what exactly caused the prosperity of the Seven Sisters of the US stock market, and what caused the bleakness of start-ups? Are there any connections between the two phenomena that occurred at the same time? I think we can think about it from the following points:
3.1 A large amount of foreign investment entered the United States
First, a large amount of foreign capital entered the United States.
Three years of the pandemic have brought down countless industries and ruined countless countries. The U.S. economy has been the least affected by this test. After three years of careful consideration, high-net-worth individuals from all over the world have unanimously placed the United States in a higher position in their global asset allocation, and a large number of them have made the United States the most important country for asset allocation.
So the question is, with all the money pouring in, why did it all go to the Seven Sisters and not to the startups? Or why did it all flow into the secondary market instead of the primary market?
You can think about it. Will the wealthy people and foreign companies who have just arrived in the United States invest in the giant companies that are more familiar to everyone, or will they invest in the mysterious startups for private equity investment? In addition, the secondary market is open to all, but the primary market can be locked for ten years at a time. These newly arrived wealthy people and foreign companies have not yet established a firm foothold in the United States. Who dares to make such a long-term investment of ten years at a time?
3.2 The Fed continues to raise interest rates
The second point is the Fed's interest rate hike. When it comes to the Fed's interest rate hike, some people will argue with me. Yes, yes, yes, according to the usual rules, when the interest rate is high, everyone will deposit money in the bank or buy government bonds, and when the interest rate is low, everyone will speculate in stocks. This is the general logic. But now the US stock market has high interest rates and high stock prices, and the US housing market also has high interest rates and high housing prices. The reason is that after the 2008 financial crisis, the United States has continued to over-issue money and a long-term inflationary environment . Remember this sentence, continued over-issued money and a long- term inflationary environment. Some people may want to argue with me again on this point, what 2008 financial crisis, it has been so many years. This is really not an exaggeration. Think about it now. Do you often hear various financial bloggers bring up the 2008 financial crisis when analyzing some economic phenomena? It's not that these financial bloggers are too lazy. The 2008 financial crisis is comparable to the Great Depression of 1921. It is a catastrophe that the United States and even the world will take the next century to digest. Even today, governments around the world print money whenever they encounter financial problems. This is a bad habit that began to form after 2008.
Let's go back to the key words " continuous money supply and long-term inflationary environment ". This has actually been the situation for nearly 20 years since 2008. This situation has caused too many US dollars in the market. How much? After the interest rate hike, people can't put them in low-risk configurations such as banks and treasury bonds. There are still a lot of overflows in the stock market and the housing market, which are medium-risk configurations, leaving only high-risk configurations such as private equity funds. No one fills up. This is why deposits and treasury bonds are full, the stock market and the housing market are high, and start-up companies are bleak in financing.
3.3 Artificial Intelligence Strengthens Head Effect
The third point is the increasingly obvious head effect of artificial intelligence. Everyone knows that the rise of the seven sisters in the US stock market this time is largely due to the outbreak of artificial intelligence. " For whoever has, to him more shall be given, and he shall have an abundance; but whoever does not have, even what he has shall be taken away from him ." The Matthew effect has been very obvious in the Internet era of the past two or three decades. Google has obtained 88% of all Internet search market share in the United States, Facebook controls 42% of American social media, and Apple IOS and Google Android almost monopolize 100% of mobile operating systems. With the advent of the post-epidemic era of artificial intelligence, this head effect is even more obvious. Since the beginning of 2024, the seven sisters in the US stock market have contributed 82% of the increase in the S&P 500 index. It is already concentrated enough, and the seven sisters are not evenly divided. Among them, Microsoft and Nvidia have contributed about 75% of the increase. Microsoft has Open AI, and Nvidia sells chips to all artificial intelligence manufacturers. There is always a strong one among the strong.
Artificial intelligence requires big data and big models, and startups cannot compete with big companies in this regard. The research and development of artificial intelligence requires a large number of chips to process so many calculations, which is why Nvidia has made so much money by selling chips in the past two or three years. At this point, I really want to say that chips are definitely hard currency now. Recently, someone consulted me and said that a truck carrying a truckload of chips from San Jose to San Bruno suddenly lost contact. In the past, it was "absconding with the money", but now it is "absconding with the chips".
Under such circumstances, startups are having a hard time. Will this situation disappear? Of course it will, but how long will it take? Unfortunately, I estimate that it will take about three to five years from 2024. In three to five years, college graduates will graduate, and everyone knows how difficult the three years of the pandemic were. So today's founders are indeed in a severe entrepreneurial winter that has not been seen in recent decades.
But don’t be afraid, everyone watching the video, you will definitely be able to get through this because you are the founders who are paying attention to Lawyer Liu and can change the world.
Silicon Valley’s 42-chapter legal encyclopedia tailored for founders. I’m Liu Xiaoxiao, an American lawyer. See you next time.
