Do We Have An “Intangible” Stock Market?

The ratio of tangible (e.g. cash, machinery, real estate) to intangible (e.g. goodwill) has changed substantially over the years. In 1975 fully 83% of the S&P 500’s total assets were classed as tangible. Today, that number has fallen to 10% with 90% of reported assets considered to be intangible.

This dramatic transformation is due to a host of factors, with the rapid evolution of technology producing the biggest change to the composition of balance sheets. Rising markets, and a trend to valuing companies more by their perceived business franchises rather than by hard assets, has allowed the issuance of stock at multiples of book value which increases the weight of intangible assets on balance sheets.

The trend to a higher ratio of intangible assets began around 1990 which coincides with the start of the long-term underperformance of value stocks compared to growth stocks. The chart serves to illustrate that markets are dynamic that we must be prepared to adapt to change.

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