The bizarre ‘disappearance’ of Alibaba founder and executive chairman Jack Ma for several months has got to be the Chinese Communist Party’s most striking initiative yet to keep the country’s tech sector under firm control. It was not an isolated event: since then we have seen China cancelling the Ant Group’s IPO, banning Bitcoin and prohibiting cryptocurrency mining, for example. None of this contradicts Beijing’s long-term strategic effort to catch up with the world’s tech leaders (cf. its position in 5G), however. China’s R&D spending is now 15 times greater than it was 20 years ago.
Given this apparently inexorable rise in a sector with strong connections to national security, Western countries are trying to respond with a common front. Taken together, their R&D spending is still twice as high as China’s, which inevitably changes the picture in what used to be seen as a purely Chinese–American trade and tech war. In international strategic terms, the USA is still of course keen to maintain its leadership, even if the much-heralded collaboration with the European Union has yet to take tangible form. Either way, we are looking at another step towards the reinstatement of global power blocs – think of the RCEP in Asia, at least as far as trade goes – that carries echoes of Cold War days.
The USA is hardly a novice in antitrust matters and cannot be accused of lagging China on the issue, notwithstanding Beijing’s recent drive to bring large private groups to heel. Even during the Trump presidency there was talk around the need to regulate today’s ‘trusts’, notably GAFAM, especially as these companies now feel it is their place to stray beyond business to influencing public opinion and moral and political debate. Joe Biden’s election has only increased the focus on their activities, and the coming years will see more rather than fewer attempts to regulate them.
The microeconomic news is still good, with US companies expected to generate faster earnings growth than we have seen for a very long time. Analysts are forecasting aggregate earnings growth for the S&P 500 of 62.8% in Q2, the biggest gain since the post-subprime crisis rebound in Q4 2009 (108.9%). Note that Q1 ended up with aggregate index earnings growth worth 52.5%. Taken together, 2021 is on track for a 35.2% jump in profits; this would leave aggregate S&P 500 earnings some 15% above their 2019 highs, more than making up for the damage caused by Covid in 2020.
Although we broadly agree with these upbeat forecasts for 2021, we believe that earnings growth expectations for 2022 and 2023 are far too optimistic, especially in the USA at 11.6% and 9.1%, respectively.