Macroscope | Why stock market stars are at odds with real world’s investment needs

Investors around the world have been dazzled by the performance of the ‘Magnificent Seven’ US tech stocks and, to a lesser degree, Europe’s ‘Granolas’

The size and influence of these giants are taking investment away from essential socioeconomic causes such as climate change, infrastructure and more

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An electronic screen displays Japan’s Nikkei index as the share average hits a record high in Tokyo on February 26. We should be re-examining the role of private and public sectors in allocating financial resources to the global economy. Photo: Reuters

Published: 4:30pm, 2 Mar 2024

The madness, rather than magic, of the marketplace has rarely been more apparent than of late with the glorification of the “Magnificent Seven” stocks on Wall Street and the more frivolously labelled “Granolas” in European markets.

These 18 companies have been supercharged to a combined nearly US$16 trillion in value by the latest episode of irrational exuberance on the part of equity investors. They are worth a king’s ransom while thousands of other stocks languish in relative poverty.

This is alarming, and not only because the US and Japanese stock markets are riding at record highs, with France and Germany pursuing them at a distance, risking a major price correction. It also points to a massive misallocation of global financial resources that can only end in tears.

We should be asking much deeper questions now than simply about whether and when another stock market bubble burst might come. We should be re-examining the role of private and public sectors in allocating financial resources to the global economy. Failure to do this could result in a dramatic rise in tax rates around the world as governments are forced to assume financing responsibilities that the private sector – stock investors in particular – have long eschewed.

As of early 2022, there were more than 58,000 companies listed on stock exchanges worldwide. Even with so large a number, there are huge areas of economic activity and social need that it does not encompass.

The total value, or market capitalisation, of the world’s listed stocks was estimated at US$112 trillion as of last July, an amount that exceeded the size of the global economy in terms of GDP, which was about US$101 trillion in 2022. The United States holds the lion’s share of the market as Wall Street’s total capitalisation of more than US$46 trillion is nearly double the country’s 2022 GDP of US$25.4 trillion. Compare that to China, where the combined market cap of US$11.5 trillion was a little more than half the US$18 trillion GDP in 2022.