Why should European trustbusters have all the fun? 

Last week, the US Department of Justice prevailed in its lawsuit arguing Google illegally conducted business to maintain a monopoly in the search engine industry. The landmark decision marks the first major antitrust win over Big Tech since the Microsoft case in 1998. It’s also regulators’ biggest victory this century in a case claiming a company violated Section 2 of the Sherman Act. Perhaps not so coincidentally, Google’s search monopoly is showing signs of cracking. 

Search and Destroy

Section 2 of the Sherman Act is pretty clear, stating no party can “monopolize, or attempt to monopolize … any part of the trade or commerce among the several States.” But the modern Supreme Court has found plenty of room for interpretation — and, according to antitrust proponents, plenty of opportunity to erode the act’s power. In the 2004 Verizon v. Trinko case, for instance, the court essentially argued “the pursuit of monopoly, even for short periods of time, is actually socially beneficial,” Daniel Hanley, senior legal analyst at the Open Markets Institute, told The Daily Upside. Anat Alon-Beck, a professor of corporate law at Case Western Reserve University, told The Daily Upside that the US has always believed in the social benefit of monopolies — until it hasn’t. Like the railroad giants and oil barons of a century ago, Alon-Beck argued that Google spent years building important and useful infrastructure in the digital world. That inevitably creates insurmountable barriers to entry for competitors, sparking antitrust action. 

But if antitrust action is inevitable for monopolies, so too may be complacency. “Between 2010 and 2020, specifically when COVID hit, I think [Google’s] pace of innovation actually slackened,” Udayan Bose, founder and CEO of digital growth marketing agency and Google Premier Partner NetElixir, told The Daily Upside. It’s why Google’s roughly 90% search market share may be weakening, with or without regulatory enforcement:

• Google has long been wary of Gen Z’s habit of using TikTok and Instagram for searches it traditionally fields. Worse, artificial intelligence chatbots threaten to undermine the entire industry.
• Meanwhile, companies using Google’s ad platform have faced annual cost-per-click inflation, without necessarily seeing increased performance. According to Bose, many small and mid-sized clients have grown increasingly curious about diversifying strategies off the platform as margins deteriorate.

Are We Exclusive? Still, it’s the courts that will act as the biggest catalyst for cracking the monopoly. In September, all parties of the case will reconvene to address remedies to Google’s antitrust violation. That may include forcing the company to divest its Chrome browser, or, more likely, requiring that Google end exclusivity deals with fellow tech players (such as paying Apple $20 billion per year to maintain its status as the default search engine on iDevices). Of course, Google will almost certainly appeal the decision, a process that’ll likely take years to conclude. By then, the world may be a lot different. As one former senior Google executive recently told Reuters: “AI is going to move faster than the speed that DOJ can move against Google.”

The unwinding of the carry trade has pummeled markets, but where she stops nobody knows. 

A carry trade, unlike some financial wizardry, is mercifully simple to explain: You borrow money in a country with low interest rates — Japan, China, or Switzerland, for example — and use it to buy a higher-interest-rate currency like the dollar (or an asset with a higher expected turn, like stocks or crypto).

Carry on My Upward Yen

Japan had been the world’s favorite place to get money on the cheap because its central bank kept ultra-low, even negative, interest rates to combat decades of stagnation. As prices finally started rising, Tokyo hiked rates this year. Along with weakening US labor market data, this has pushed the yen up against the dollar in recent weeks. That makes a key source of funding for markets suddenly pricier, which triggered sell-offs. And those sell-offs may not be finished:

• There’s no definitive number for how much is tied up in the carry trade because it’s used by so many market stakeholders, from family funds to corporates to hedge funds. According to the Bank for International Settlements, cross-border yen borrowing — not all of it necessarily carry trades — has risen by $742 billion since the end of 2021. ING estimates outstanding cross-border yen loans as of March amounted to $1 trillion.
• JPMorgan Chase analysts estimated that 75% of global carry trades had been unwound on Wednesday. They added that returns on Group of 10, emerging market and global carry trade baskets had fallen 10% since May, writing that the “clock is ticking for the G10 carry.”

Beg to Differ: “We suspect that the top layer of carry – speculators in yen futures markets – may be close to flat in their positions now. As to the deeper layer of the yen carry, we think it is very hard to tell,” ING foreign exchange strategy head Chris Turner wrote in an investor note. “We would take any definitive declarations of the yen carry trade being 50% or 75% unwound with a pinch of salt.”

The AI bubble hasn’t popped; it’s just saving room for the rest of us. 

Thanks to a favorable earnings season for many in Corporate America, S&P 500 stocks — excluding the Magnificent Seven — are on pace to deliver their first profit growth since the fourth quarter of 2022, Bloomberg reported. Say hello to the Magnificent 493. 

Mind the Gap

By this spring, the market had become highly concentrated: The top 10 largest companies on the S&P — most of which are Big Tech stocks riding the AI wave — accounted for one-third of the entire index. The S&P hadn’t been that top-heavy since the 1970s. 

And that’s still the case, but as far as profits go, the gap between megacaps and the rest of the S&P is narrowing:

• Profits for the Mag-7 — Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia — are set to rise 35% in the second quarter year-over-year, according to Bloomberg Intelligence. It’s healthy growth, but a slowdown from last year, making way for some much-needed diversity in all our portfolios.

• After five straight quarters of decline, S&P securities outside of the Mag-7 are set to grow 7.4% in the second quarter year-over-year. Home Depot, Walmart, and Target — which will report earnings this month — are expected to be major contributors to the growth, too. 

SMIDdling Returns: JPMorgan says megacaps and things like Nvidia, Apple, and Microsoft battling it out for the title of biggest company on the planet have distracted investors from the rest of the market, and all the high-quality SMID-cap stocks it has to offer, over 90% of which have minimal analyst coverage. In June, the bank said smaller-cap securities are now trading at a near-record valuation discount versus their large-cap peers, despite having similar cash flows and profit margins, creating a potential entry point into SMID-cap stocks for investors. Don’t forget about the (relatively) little people.