SB Cap Issue 5, 6/24/24

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SB Capital
June 24, 2024

SB Capital Insights

6/24/2024

Good morning. Nvidia briefly surprised Microsoft in market cap. In this issue we explore how tech is leading growth in the S&P and why that's an important differentiator to investors. In addition we dive into a Supreme court ruling on unrealized gains and its great implications. Stay tuned for key economic indicators and important headlines to prepare yourself for the week.

We are proud to be releasing issue #5 and would love to hear feedback from our readers on ways we could improve our work.

Markets 

  • Nvidia briefly became the world's largest company, with a market cap of $3.24 billion, surpassing Apple and Microsoft. Thursday began a 9.52% sell-off, taking away the position of number one. This is an indication of investors taking profit.

  • High returns from big tech are propping up the market and could be misleading to investors regarding the actual conditions of the stock market. 

    • In order to explore this we have created an index (MAG 6) that is composed of the 6 largest companies in terms of market cap: Microsoft, Apple, Nvidia, Google, Amazon, and Meta. Similar to the S&P 500, the index is weighted based on market cap and is re-balanced quarterly. 

(SB Capital proprietary research, link to excel sheet) 

  • The chart represents a 2 year period of both the S&P and MAG 6. Both began with a dollar value of $10,000 starting at 6/30/2022. The real turning point was February 2023 where these companies began to greatly outperform the benchmark index. The gains seen on the S&P can be greatly attributed to the gains from these companies. Therefore, the 25.67% 1 year returns seen this year in the S&P is not a reflection of the other 494 companies on the index. A pull back in the MAG 6 could have great implications for the entire U.S. stock market. 

  • SB Capital believes that an investment in the S&P 500 is increasingly becoming a bet on major tech companies rather than a bet on growth in U.S. markets.

Most important tax case in a century

In Moore v. United States, the plaintiffs argued that a tax on unrealized foreign gains is unconstitutional. They argued that the 16th amendment, which enabled the federal government to collect taxes, did not apply to unrealized gains. The tax on unrealized foreign gains was part of Trump's 2017 tax cut policy, and while the plaintiffs argued for a $15,000 refund from an investment in India, it has much larger implications for many interested parties.¹

A conservative supreme court was stuck in a challenging position. The court's interpretation of the 16th amendment and the government's power to tax unrealized gains will have major implications for the legality of proposed progressive tax laws. A ruling in favor of Moore would make the unrealized foreign gains tax illegal. This ruling alone could cut off an estimated $340 billion in tax revenue.² Justice Kavanaugh said that ruling in favor of the plaintiff would “require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it—including, of course, on ordinary Americans.”

On June 20th the court ruled against the plaintiffs and upheld the tax law. While keeping a key source of federal income intact, the ruling has opened the door for proposed wealth taxes, highly unpopular among the Republican party. 

Popular among Democrats as a potential solution to growing deficits, these proposed wealth taxes would be on the ‘1%.’ The taxes would treat unrealized capital gains, which the plaintiffs’ attorney Andrew Grossman defined as “appreciation in the value of a home, a stock investment, or other property,” as taxable income. It's a popular opinion among Democrats that the ‘1%’ do not pay their fair share of taxes as their income disproportionately comes from investments rather than traditional salaries.³

While any major tax reform on unrealized capital gains is unlikely, there is now a legal precedent for progressive reform. This debate is expected to grow as a wealth tax becomes more popular among Democrats and others who seek tax reform. For Republicans it's a “potential issue for another day.” (Justice Kavanaugh)

What to look out for this week

  • The first presidential debate is set for Thursday at 9 pm and will be hosted by CNN. The format is simple: 90 minutes, two commercial breaks, and no communication with campaign staff. 

  • GDP for Q1 will be released Thursday and it’s forecasted to be a 1.4% increase, adjusted for inflation. GDP is the broadest economic indicator and offers an insight into the health of the economy, which is important as growth slows down and policy makers continue to work towards a soft landing.⁴

  • Core PCE, the Fed’s preferred inflation gauge, will be released Friday. This will be closely watched by the Fed as it requires “greater confidence that inflation is moving sustainably toward 2 percent” (Powell) before beginning to cut rates.

  • Nike will report earnings Thursday. It's down 11.27% YTD but new marketing efforts for the Olympics could promote sales. 

  • Nvidia will host its shareholder meeting this Wednesday. Investors will be looking out for new products to continue its dominance in the sale of semiconductors used for AI.

Noteworthy

  • Hedge funds rely on leverage to increase their AUM. A years-long low interest rate regime made the cost of borrowing cheaper, hence creating an influx of capital invested into these funds. These funds rely on talented traders, and an increase in AUM has increased demand for talent. What has ensued has been a talent war that is having a significant impact on the industry. Funds are setting aside larger amounts of returns towards payroll and investing in programs to build talent. 

    • If you think you have what it takes to trade for a hedge fund now might be the moment to position yourself for a coveted seat in these hedge funds’ training programs. 

⁵

  • The Winklevoss twins donated $2 million in Bitcoin to the Trump campaign. Donations continue to soar and are putting the campaign in a financial position to air more television ads.

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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