Take all the physical assets owned by all the companies in the S&P 500, all the cars and office buildings and factories and merchandise, then sell them all at cost in one giant sale, and they would generate a net sum that doesn’t even come out to 20% of the index’s $28 trillion value. Much of what’s left comes from things you can’t see or count: algorithms and brands and lists.
This is, in the broadest sense, a new phenomenon. Back in 1985, for instance, before Silicon Valley came to dominate the ranks of America’s biggest companies, tangible assets tended to be closer to half the market’s value.
The shift picked up after the financial crisis of 2008 and is taking off anew during the Covid-19 lockdown, with the value of intangible-heavy companies like Google and Facebook soaring while smokestack stocks languish. All of which is a source of deep concern for those who worry about things like employment and inequality.
The rise of intangibles helps explain why many American workers have recently had it so rough, with wages stagnating and benefits disappearing, and signals the slide could continue, according to the New York University professor whose writings have ignited a debate on the topic in academia, Baruch Lev.
In the abstract, it’s behind the backlash against giant tech firms that found its way into Congress. Put simply, these assets don’t require the hordes of workers to create and maintain them the way old economy ones did.
So for all the hand-wringing and fretting about how the pandemic run-up in tech stocks bespeaks a bubble that’s bound to burst, what if the bigger concern is that it doesn’t?
“When people think about this growing income inequality, much of it comes from the growing inequality in the corporate sector,” says Lev, the director of accounting research at NYU’s business school. “Those that are successful are enormously successful. And the others that still employ lots of people really cannot get out of this trap.”
At one level, this is all perfectly rational. Stock investors are just anticipating, and putting claims on, these companies’ ability to generate revenue streams for years to come. Industrial innovation has been framed as anti-human since its earliest days, often wrongly. Even the terms are squishy -- assigning market value to the tangible and intangible property is in many respects a judgment call.
Still, researchers including Lev are stepping up warnings, concerned about the influence of Covid-19 on the economy and equality.
By way of illustration, consider a company like Adobe Inc., whose programs altered the printing industry. So valuable are its formulas and algorithms that even with a market cap of $237 billion, the value of its hard, tangible assets comes out to virtually nothing. Adobe employs more than 22,000 people, by any measure a lot, but it’s part of a technological wave that by some yardsticks cut employment in printing by half. (An Adobe spokesperson declined to comment.)
If you work at a company riding this wave or better yet own one, you’re doing well. Adobe shares are up 50% this year, part of a surge in tech shares that has added $2 trillion to their combined market cap even as a recession raged. For everyone else, the news is less good. One loose way of thinking of the impact is that while intellectual property tends to create a small set of well-to-do workers, it often displaces a larger set of hourly ones.
“As we’ve all had to move into a digital world, it makes sense that a lot of the investments are in a digital world, which are intangible,” said Megan Greene, senior fellow at the Harvard Kennedy School. “It comes at the expense of the worker, though. This crisis has accelerated a lot of things, and that’s one of them.”
While even experts differ on what constitutes an intangible asset, and some view Lev’s definitions as loose, expansion in the value of things like Facebook Inc.’s advertising platform, Netflix Inc.’s customer algorithms and Amazon.com Inc.’s user networks is attracting attention now if for no other reason than it explains a mystery of the pandemic era: the stock market’s uncanny resilience.
Whenever someone points out that six or seven gigantic tech stocks dominate the S&P 500 like never before, they’re partly describing the rising dominance of invisible assets. Rallies in companies like Facebook and Alphabet Inc. are a key way the value of intellectual property has expanded.
As a result of those gains, S&P 500 members held more than $21 trillion in intangibles at the end of 2018, more than double 2005, according to a report by research center Ponemon Institute and Aon Plc, a professional services firm that provides risk and insurance consulting. That’s 84% of the S&P 500’s market value, the most ever.
To be sure, not everyone buys those numbers, which treat anything that isn’t directly ascribable to a tangible asset in the S&P 500’s market value as intangible. “I got a Ph.D in finance, not accounting, but I would say I’m not sure if I agree,” said Linda Zhang, CEO and founder of Purview Investments and senior adviser to Social Finance Inc. “Market cap is an indication of willingness to pay for future earnings. Part of that difference could reflect how much both tangible and intangible assets can generate in earnings in the future. I don’t think the difference is just intangible.”
Even so, the market has never traded at such premiums to its hard assets. Data compiled by Bloomberg show the S&P 500 sits at more than 12 times its tangible book value, a record multiple.
While premiums on invisible assets have risen before, particularly in the dot-com bubble, this trend is bigger and more entrenched, given the enormous earnings that intellectual property now generate. Like most things in the economy, it’s being amplified by Covid-19, which divides have and have-nots according to who can work from home. The rich are getting richer in markets, too: as shares rebounded, valuations for the most expensive firms rose three times faster than the rest, Bloomberg Intelligence data show.
In the economy, that signal -- the market’s appetite for earnings based not on plants and machinery but ideas -- feeds itself. The share of business investment targeted at invisible assets is right now rising 1 1/2-times faster than it did during the financial crisis, itself a record period of hyper-investment in intangibles, estimates Jason Thomas, the head of global research at Carlyle Group.