Impactful Moats
Maintaining market leadership presents formidable challenges. Competitors inevitably converge wherever there's a frontrunner, aiming to capitalize on their success and potentially overthrow them. James Madison, one of America's Founding Fathers, vocally opposed opening a federal bank to serve the treasury needs of a nascent American government. Madison and others feared that a national bank would foster a monopoly, stifle fair competition, and undermine public trust in a fledgling democracy. Despite their spirited arguments, Madison and his allies ultimately faced defeat, and the First Bank of the United States opened in February 1792, constructing America's largest corporation during that era.
Themes rooted in history persist in the twenty-first century. Recently, mega-size corporations have overtaken investment-related conversations, creating new buzzwords like the "magnificent seven." As of late, the biggest seven stocks traded on American exchanges were Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA, and Tesla. The collective market value of these seven stocks alone has grown to such an extent that it nearly rivals the annual value of goods and services sold across broader Europe. Naturally, soaring success draws attention from competitors looking to take profits, regulators scrutinizing business practices, and investors eager to capitalize on recent gains. Just as the mythological figure Icarus flew too close to the sun and attracted consequences, these corporations are under increasing scrutiny as their influence expands.
This illustrious group of stocks has seemingly secured its position by offering superior products and services, pioneering innovations, and fortifying formidable barriers to entry for potential competitors. Consequently, these stocks have reaped substantial profits over the years, solidifying their status as industry leaders. Among them, NVIDIA is a quintessential example of what it takes to belong to this elite group. The stock price of the California-based semiconductor manufacturer has surged in recent weeks following announcements of sustained demand for its products and massive increases in reported profits. NVIDIA's dominance in the market embodies its unparalleled microprocessors, which are unrivaled in running artificial intelligence models at scale. The consensus among industry insiders is that no other company comes close to replicating or surpassing the technological prowess contained in NVIDIA's GPUs. Consequently, NVIDIA boasts staggering profit margins that underscore its unmatched position in the industry.
The encouraging news for investors is that the dominance of the most successful stocks extends its influence throughout the whole market. As a result, the stock market has generously rewarded investors since bottoming in October last year. Particularly, market sectors categorized as "growth" have outperformed others significantly. Investors have favored growth-related sectors due to the substantial capital expenditure that growth companies typically allocate toward advanced technologies and the anticipated future dividends stemming from these innovations. Consequently, investments in artificial intelligence have proven particularly lucrative, with market leaders adeptly leveraging this new technology to their advantage. This phenomenon has effectively acted as a rising tide, lifting the prospects of all investments throughout markets.
Nonetheless, some investors may view the concentration at the top as indicative of a burgeoning stock market bubble. These skeptics often draw parallels to previous periods of exuberance, echoing concerns about the sustainability of current market trends. However, it's essential to note that a substantial portion of the gains in the stock prices of the major seven is explainable by the growth in their earnings per share. Moreover, in some cases, such as with NVIDIA, the price-to-earnings multiples, a typical valuation tool, are lower today than a couple of years ago. So, while paying attention to equity valuations is important, especially when many fixed-income assets are yielding four percent or more, it's also vital not to jump to any quick assumptions that something irrational is happening on a broader scale.
Madison eventually prevailed when Congress allowed the charter of the First Bank to lapse during his presidency, only to sign a second national bank into law later. Thus, the saga of national banks is a compelling illustration that whenever something occupies the pinnacle, a contender vying for that coveted position inevitably arises.
