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Welcome back. Fifty years ago, the assets held by S&P 500 companies were predominantly physical — factories, equipment, inventory et cetera. But today, it is estimated that around 90 per cent of their assets are intangible, ranging from intellectual property, brand value and networks, to code, content, talent and knowledge.
This week I argue that this transformation helps to explain four prevailing themes in the US stock market: high concentration, exceptionalism, volatility and bubble-like valuations.
In the US, spending on intangible assets surpassed tangible investments as a share of GDP in the late 1990s, and the gap has widened ever since, according to data from the World Intellectual Property Organization.
America is also, by far, the largest source of measured intangible investment in the WIPO’s sample. Last year, investment reached $4.7tn in current prices, nearly twice the combined total of France, Germany, the UK and Japan.
For all intents and purposes, the US is an intangibles-driven economy.
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Crucially, disembodied assets have very different economic properties to physical ones.
“Intangibles are much more scalable: they have high upfront fixed costs and zero marginal costs. Once code is written, producing additional units of software costs nothing,” says Kai Wu, founder of Sparkline Capital, who has developed a methodology to measure firm-level intangible value.
“The greater synergies inherent in intangibles also fuel a winner-takes-all dynamic,” he adds. An example of this is how Apple’s iOS, App Store and iCloud help reinforce the dominance of the iPhone.
These traits explain US business dynamics today. First movers have grown large, exponentially so, with their size acting like a competitive moat. A narrow set of superstar firms drives the country’s growth.
Using a sample of around 900 US companies between 2011 and 2019, the McKinsey Global Institute found that just 5 per cent — accounting for 23 per cent of employment share — generated 78 per cent of positive productivity growth.
For measure, the WIPO finds that intangible assets make up 90 per cent of the total enterprise value of the 15 largest American companies, considerably higher than that of the broader US corporate sector.
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This translates to the US stock market.
Today, the top 10 stocks account for 40 per cent of the S&P 500’s market capitalisation and 33 per cent of its profits, according to Andrew Lapthorne, global head of quantitative research at Société Générale.
Market concentration has risen to these historical highs following steep growth since the mid-2010s, driven by the Magnificent 7 tech stocks.
This group includes Apple, Alphabet, Amazon, Meta and Microsoft, whose intangibles-heavy asset base of software, algorithms and digital platforms benefits from scalability and synergies. Today, these assets — alongside the data and talent the firms have amassed — are being used to power their shift into artificial intelligence.
Jonathan Haskel, professor of economics at Imperial College London, adds that scale and, in turn, concentration can become “supercharged” by network effects. For instance, as more buyers and sellers join Amazon’s online marketplace, they raise its value for users, creating a positive feedback loop.
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In this way, the dominance of America’s intangibles-led businesses also helps to explain the “exceptionalism” of US markets relative to the rest of the world, particularly over the past decade.
Research by Sparkline Capital shows that relative to the MSCI US equity index, the international benchmark (excluding the US) has over 20 per cent more weight allocated to traditional, capital-intensive sectors, such as financials, industrials and materials — and over 20 per cent less in intangibles-driven, “new economy” sectors, such as technology and healthcare.
This has underpinned divergences in growth, profits, earnings expectations and valuations between the US and other developed markets. (Andrew McAfee, a principal research scientist at the Massachusetts Institute of Technology, underscores the chasm between US and European corporate power in his Substack.)
Analysts reckon Big Tech’s large investments in data centres won’t notably alter this dynamic, since the expenditures are geared towards developing vast intangible assets, including AI, new applications and knowledge (from the data it processes). This means the industry will remain predominantly non-physical.
Indeed, Haskel adds that the Magnificent 7’s access to vast amounts of existing data via their digital platforms gives them a synergistic advantage in today’s AI race. “Expect the US and EU gap to continue, or maybe get even bigger.”
Separately, the AI narrative — and the dominance of tech more generally — also contributes to the S&P 500’s relative resilience to US President Donald Trump’s tariff blitz compared to international markets. Intangibles-led value is harder to tax. (Plans to raise import duties on semiconductors could, however, have a knock-on impact.)
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The rise of intangible assets within the S&P 500 could be adding to market volatility, too.
First, with a narrow group of companies driving the index, idiosyncratic risk causes it to be more volatile than a broader, more diversified portfolio, says David Kostin, chief US equity strategist at Goldman Sachs, in a November 2024 research note.
Second, intangible investments tend to be financed using internal funds or equity, as they are harder to pledge as collateral for loans. Still, their valuations can become particularly sensitive to both actual and expected changes in the interest rate path.
Intangibles often derive most of their current value from potential future cash flows. For example, a large language model monetised via subscriptions may produce steady earnings over many years. As rate forecasts shift — as they do frequently in response to data releases — the discount rate applied to future earnings changes too.
Third, non-physical assets are hard to value. For instance, a patent could be worthless or worth billions, with its value dependent on factors including regulation, competition and market adoption. Again, these idiosyncrasies can drive rapid fluctuations in value.
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The rise of the intangible economy may also contribute to the S&P 500’s apparent bubble-like pricing today (relative to economic and balance-sheet fundamentals). Right now, the index is historically expensive based on several metrics, including the price-to-earnings and price-to-book ratios.
While physical investments accumulate as assets on corporate balance sheets, accounting convention largely leads intangible assets to be treated as an expense, unless they are acquired. This means intangibles-intensive companies appear expensive, particularly when compared with their book value and reported earnings.
GDP data also neglects many important intangibles, including branding, employer-provided training, organisational capital, financial product innovation and some forms of research and development.
The WIPO calculates that “unmeasured intangibles” amounted to around $2.7tn in current terms last year in the US, and would have added over 0.2 percentage points to America’s average labour productivity growth rate between 2010 and 2024 if included in GDP.
For US stocks, Wu of Sparkline estimates that accounting for intangible assets would cut perceived overvaluation by about 25 to 50 per cent, relative to headline valuation metrics. “While the market is by no means cheap, once firms are given credit for their intangible assets, valuations look far less frothy than the headlines imply,” he says.
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The rise of the intangible economy does not explain everything: the S&P 500 is still shaped by speculation (including today’s faith in the future pay-offs from AI), as well as liquidity conditions, economic policy and politics. Nor does it mean that historically high valuations and market concentration aren’t worth interrogating.
Still, understanding how software, data and IP influence the growth and value of companies does help to make sense of current economic and market dynamics. It brings an economic logic to the outperformance of American equities, the dominance of tech firms, and their sky-high valuations. At the very least, it helps make the exuberant US stock market seem a touch less irrational.
Send your thoughts and rebuttals to freelunch@ft.com or on X @tejparikh90.
Food for thought
The desire for status motivates a significant proportion of human behaviour. But what is more important, actually being richer than others or simply being perceived to be richer? This study investigates.
Free Lunch on Sunday is edited by Harvey Nriapia
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