The Return of the Trust Busters
Big Tech is in Their Sights
The Backstory
Let’s take a trip back in time – to the turn of the 20th century. It’s the Gilded Age, a time of top hats, tycoons with more power (and personality) than most countries. Cars were still a rarity, so trains remained king. The Industrial Revolution had taken place, many Americans were busy dealing with the hustle and bustle gritty city life along with the bad air and sanitation it brought. A select few men, “robber barons”, as they came to be known - were rolling in unimaginable wealth. These titans of industry, like John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt, didn't just have companies, they had empires. Today, we call these conglomerates, but back then they were called “trusts”. And the owners of these trusts didn’t let anything stand in the way of expanding those empires - including roughing up striking workers with a hired security force when necessary, the biggest of which was the Pinkerton Detective Agency.
The Homestead Strike of 1892 was one of the most violent and pivotal labor conflicts in U.S. history. It took place at the Homestead Steel Works in Pennsylvania, owned by Andrew Carnegie and managed by Henry Clay Frick. The strike erupted when Frick, intent on breaking the Amalgamated Association of Iron and Steel Workers (AA), cut wages and refused to negotiate with the union, prompting workers to walk off the job. Frick responded by hiring Pinkerton agents to guard the plant and enable non-union labor to enter, leading to an armed confrontation between the workers and the Pinkertons. The battle ended with several fatalities and injuries, sparking nationwide debate on workers' rights and corporate power.
Following the violent clash, the state militia was brought in to restore order, and Frick resumed operations with non-union labor, effectively breaking the strike. The defeat at Homestead was a major setback for the AA and marked the decline of union power in the steel industry for decades. Public opinion was divided: while some sympathized with the workers, others feared the disruption of labor strikes. The Homestead Strike was a major turning point, underscoring the brutal lengths to which corporations would go to suppress unions and maintain control over labor, setting the stage for future labor reform movements in the U.S.
Consider Standard Oil, the ultimate “Gilded Age” beast. John D. Rockefeller's company was so massive and ubiquitous that political cartoonists gleefully drew it as a giant, tentacled monster squeezing the life out of Uncle Sam, Congress, and even the White House. It wasn’t just a corporation; it was practically an arm of government—or so the people thought. With Rockefeller controlling 90% of America’s oil refineries, he could adjust prices on a whim, suffocating competitor’s cash flow as he raked in gobs of profit. “Trust-busting” was the name of the game, as trust funds and trusts weren’t just family legacies but corporate giants that controlled everything from oil to sugar.
Enter President Teddy Roosevelt, who made it his life’s mission to knock a few of these giants down a peg. Roosevelt famously took on Northern Securities, a railroad behemoth that combined the lines of J.P. Morgan, James J. Hill, and E.H. Harriman. According to legend, when Roosevelt told Morgan he would bring a lawsuit, Morgan, titan that he was, suggested, "Send your man to my man, and we can fix it up." Not so fast, said Roosevelt, who wanted nothing short of a full public trial. The resulting breakup of Northern Securities set the stage for what we now know as antitrust law—proving that, for once, the government wasn’t about to be “bought out.” The Gilded Age's trust-busting zeal has become the stuff of economic lore.
The history of antitrust law in the United States began in the late 19th century, as Americans’ animosity grew, politicians sought a solution. In 1890, the Sherman Antitrust Act was passed, becoming the first federal statute to combat monopolistic practices. The Act aimed to prohibit business activities deemed anti-competitive, making it illegal for companies to restrict trade or attempt to monopolize a market. In the early 20th century, President Theodore Roosevelt, enforced the Sherman Act rigorously, breaking up major corporations like Standard Oil and the Northern Securities Company. Roosevelt’s aggressive stance on antitrust marked a period of heightened scrutiny on corporate power, and his successor, William Howard Taft, continued this approach, overseeing even more trust-busting cases than Roosevelt. During this time, additional legislation was enacted, including the Clayton Antitrust Act of 1914 and the establishment of the Federal Trade Commission (FTC) to oversee antitrust policy and prevent unfair business practices. These moves laid a foundation for modern antitrust enforcement and set precedents for handling monopolistic behavior.
Big Tech is Even More Powerful
Fast forward to the digital age, and antitrust action has taken on renewed urgency with the rise of Big Tech. Companies like Microsoft, Google, Amazon, and Apple have faced increasing regulatory scrutiny for practices that critics argue stifle competition in digital markets. Notably, Microsoft faced a significant antitrust lawsuit in the late 1990s, resulting in a settlement that imposed restrictions on its business practices. These days, the DOJ and FTC continue to focus on potential monopolistic behavior, especially in digital platforms, cloud computing, and AI. These cases mark a new chapter in antitrust enforcement, as regulators adapt century-old laws to tackle complex and evolving digital markets.
While the corporate titans of today may not have as much relative wealth as their predecessors, it can be argued that they may have even more power. Tech companies can track what we buy, what internet pages we see, links we click on, where we go, etc., etc. To some extent, all this knowledge may allow them to affect how you perceive the world, and therefore, how you think. You don’t have to be a conspiracy theorist to be worried about the power that comes with these abilities.
On top of that, tech companies are raking in tons of money, making their founders the new “robber barons” in some peoples’ eyes. Big Tech has done a solid job of weeding out competition, and the results are obvious. Chart 1 below shows Gross Profit Margins from some of the largest tech companies along with the average for the SPX. When there is extreme concentration in a sector, those companies can have more pricing power than when there is healthy competition. Gross Margins are the simplest way to measure pricing power. A company’s Gross Margin is the total revenue they generate for the product or service they sell minus the cost of goods (or service) sold divided by the total revenue.
As Chart 1 shows, major tech companies average roughly double the average Gross Profit Margin of the SPX. In actuality, it’s probably more extreme than that, since the tech companies pull the average up. One thing is clear, these companies are killing it – and Americans are increasingly agitated by that, as they feel they’re sacrificing their privacy and control over their lives.
Chart 2 below shows a Pew Research Poll that measures Americans’ sentiment toward large corporations. It only covers years 2019-2022, but the change in that short time is rather shocking. Democratic and Democrat leaning voters (blue line) have barely changed their opinions, but Republicans and Republican leaning voters (red line) have seen a precipitous decline in sentiment toward large corporations.
It's not exactly clear why this has happened. But the fact it’s only the right side of the political spectrum that’s had a rapid change is quite intriguing. Democrats have always had a more negative opinion of big business, but now the two sides have converged. Politically, this is huge. It’s not clear whether the driver is more economic, or cultural, but it’s likely both play a part. Regardless, Americans as a whole are developing spite toward large corporations with an already extremely nerve-wracking political situation. Democrats and Republicans can’t agree on anything these days, but they seem to agree on this.
The Republican party used to identify with free markets and big business doing pretty much whatever they want. Now, the party has developed a strong populist sentiment, as corporate titans are increasingly seen as elitist. For savvy politicians, this is an opportunity ripe for the picking. It’s not seen as a bipartisan issue quite yet, but that’s likely coming.
One thing of note: I have focused on “Big Tech” as the best example of a sector that mimics the dominancy of the 19th century “trusts”, but Democrats have a pretty favorable view of tech companies (58%), and the population is roughly split on sentiment toward tech (49%). However, in the end, I don’t think it matters, because the key is a shared dislike of large corporations in general - and that has legs.
The movement has already begun to some extent, but for most investors, it’s an afterthought. This year, several high-profile companies have been targeted by U.S. antitrust regulators in lawsuits focused on limiting monopolistic power, particularly within Big Tech. Here is a list of some of the targeted companies:
Microsoft ($2.4 trillion) - The FTC is investigating Microsoft's influence in artificial intelligence and its collaboration with OpenAI, targeting its dominant position in cloud computing and software ecosystems.
Google (Alphabet Inc.) ($1.7 trillion) - Facing two major lawsuits, Google is under scrutiny by the DOJ for monopolistic practices in both search engines and advertising technology, with potential calls to unwind acquisitions like DoubleClick.
Apple ($2.8 trillion) - Apple is under DOJ investigation for potentially monopolizing its App Store ecosystem and stifling competition, particularly within the mobile app and payments sectors.
Nvidia ($1 trillion) - As a leader in AI-focused chip production, Nvidia is also a target for the DOJ, which is concerned about Nvidia's market dominance in high-performance semiconductors crucial to AI technology.
Amazon ($1.35 trillion) - The FTC has filed a suit against Amazon, alleging it maintains monopoly power through restrictive seller policies and anti-competitive practices in e-commerce and logistics.
These antitrust actions highlight the intensifying regulatory efforts against some of the most valuable companies globally, as U.S. regulators aim to prevent excessive concentration of power and promote fair competition. Notice that every one of these companies is a member of the “Magnificent 7”. As we know, these companies have dominated the market to such an extent that they now represent about 35% of the SPX market cap.
It would be foolish to believe that antitrust action will have a near-term effect on these companies. That is, on actual earnings. The psychological effect is another thing. When everyone is bullish something in the market (a stock, a sector, etc.) gains are harder to come by. Most everyone inclined to own it are already as long as they want to be, and pulling in new investors will not provide outperformance like it once did. With seven companies representing 35% of the most important U.S. stock index, it looks like most of the good news is priced into the mega cap tech stocks, and very little potential bad news is priced in. That doesn’t mean these stocks can’t go higher, but it makes underperformance over the next few years much more likely.
Disclaimer:
The information provided in this newsletter is for educational and informational purposes only and should not be considered as investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed are based on personal opinions and analysis of market conditions, which are subject to change at any time without notice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Readers are advised to conduct their own research or consult with a qualified financial advisor before making any investment decisions. The publisher is not responsible for any investment decisions made based on the information provided in this newsletter.