Will SpaceX bring stocks thudding back to earth?

Optimism is a vital attribute when it comes to financial markets.

It can fire up booms far beyond expectations and, occasionally, even the realms of reality.

As we plough on through the fourth consecutive year of global stock records and huge annual advances, it's not surprising that many pundits have begun to question just how much longer this boom can continue.

Wall Street has only managed this feat three or four times in the past century. The first was the wartime boom from 1942. Then there was the tech boom of the 1990s that unravelled in spectacular style in 2000.

And now this. Since 2019, interrupted only by the war in Ukraine, New York's main stock index, the S&P 500, has almost tripled, driven by a mere handful of technology giants.

There's no shortage of concerns about the future.

Wars on three continents, the possibility that ongoing hostilities with Iran may permanently destabilise energy markets, rising inflationary pressures and the distinct possibility of a US rate hike when the Federal Reserve next meets in August.

There's a school of thought that higher interest rates may be the deciding factor, that they may just be the trigger to derail the frenzy gripping global markets.

But those defending the boom point to the punishing round of post-COVID-era rate hikes, sparked by the previous energy crisis after Russia invaded Ukraine, which barely caused tech stocks and the investment world to blink.

But there are other, far more fundamental shifts taking place beneath the surface that could tip the balance on this golden era of surging stocks, and Elon Musk may be just the catalyst to bring it all undone.

How fewer companies pushed stock prices higher

For the past few years, we've been assailed by stories that our local stock market has missed the boat and been abandoned by major corporations.

While there's plenty to be critical of about the ASX, the ever-shrinking number of companies on our exchange is a global trend.

And, surprisingly, it has been one of the biggest drivers of the incredible growth in stock market valuations, and, by extension, your superannuation balance.

On Wall Street, the number of companies listed has halved since 1990, from 7,500 down to 3,600.

Many were gobbled up by competitors in mergers.

But the arrival of private equity firms in the early 2000s changed the nature of public stock markets as they plundered the market for underrated investments and scooped up prospective newcomers that didn't fill the breach.

As the number of listed companies diminished, the amount of available investment targets fell, meaning more cash was distributed over a smaller number of stocks, thereby boosting returns.

The great share buy-back boom

It's not just the shrinking number of companies that have funnelled investor funds into an ever-diminishing pool of investment opportunities.

The number of shares on issue also dwindled.

Rather than investing profits back into their companies, US chief executives embarked on a splurge in their own companies' shares.

Partly it was a lack of imagination, but mostly it was for personal gain. Buying back your own company's shares boosted the share price and, given that executive bonuses are awarded because of rising stock prices, it was an easy way to pocket a massive payout.

The shareholders loved it too. Not only were profits distributed in a tax-efficient manner, but the value of their remaining stock shot up as well.

As an added incentive, because the number of available shares was slashed, a metric called earnings per share was enhanced. That made it appear as though company profits were growing at a much faster clip, which encouraged punters to buy more stock.

In the two decades to 2021, US corporations spent $US12 trillion ($17 trillion) on share buybacks,

That level has been accelerating.

According to S&P Global, US firms distributed almost $US1 trillion to shareholders via buybacks last year.

With what appears to be rapid growth in earnings, investors have been convinced to plough ever more cash into stocks and expanding the market capitalisation of corporations.

As a result, US stock valuations have blown out.

In 2011, during the aftermath of the Global Financial Crisis, America's top 500 companies traded at an average of 13 times earnings. That's now blown out to 32 times earnings.

SpaceX turns the tide

Suddenly, thanks to Musk, that trend has ended.

His launch of SpaceX a fortnight ago on the tech-heavy Nasdaq exchange has suddenly reversed the flow.

Instead of taking shares off the market, Musk initially planned to sell 555,555,555 shares to the public to raise $75 billion. But it was so overwhelmingly in demand that he added extra stock into the sale, raising more than $US85 billion.

That represented a little over 4 per cent of the loss-making company, which was snapped up by an adoring legion of fans who, in the aftermath, pushed the stock price up almost 50 per cent.

The result almost guarantees the success of two other major technology floats in the near future.

Artificial Intelligence giants OpenAI and Anthropic are both expected to raise huge amounts of cash, possibly more than $US60 billion each.

When combined with SpaceX, that is a significant lift in the available stock for purchase.

It could also tempt the other handful of tech giants to tap global stock investors once again.

Tech's thirst for cash

The tech giants are evolving as they shift into a new era.

Once capital-light idea companies peddling software to the masses, they are now in a full-blown race to build hugely expensive data centres and expand their cloud computing abilities.

That involves a major transformation to buying and dealing in hard assets: vast amounts of real estate, specialised microchips, servers, power generation and cooling towers.

Until fairly recently, they were using their own cash to pump into the AI boom. Then they began raising debt.

But the sheer scale of their expansion programs requires investment funds. Global stock markets are now being targeted.

"Global equity markets are undergoing a meaningful shift," a recent Morgan Stanley study has concluded.

"After years of software, platforms, and intellectual property growth, there is now a renewed interest emerging in traditional 'old-industry' hard asset-based companies."

But is there enough cash to go around?

And the unanswered question is what impact this will have on the current boom.

Pumping money into global stock markets while reducing the number of available investments has helped drive a boom unlike any seen before.

Reversing that course may bring the boom to a halt, particularly if those overblown valuations ever look like descending back to earth.