Friday, December 26, 2025

"The economic divide between big and small companies is growing"

But you knew that.* 

From the Wall Street Journal via MSN, December 25: 

It has been a good year for most of America’s biggest companies, with surging profits and enthusiasm for artificial intelligence propelling stocks to record highs. But for many small businesses, it has been just the opposite.

At small businesses, which are unable to withstand economic headwinds as easily as their larger counterparts, years of high inflation, increasingly cautious consumers and tariffs are weighing on earnings and prompting cutbacks. Over the past six months, private firms with fewer than 50 workers have steadily shed jobs, according to payroll processor ADP, cutting 120,000 in November alone. Midsize and, especially, large firms have continued to add jobs.

Cumulative change in employment since Dec. 2024, by firm size

Typically, in early December, Almost Famous Popcorn would have been staffing up for the holiday rush, when the gourmet popcorn company does 60% of its sales.

“In a normal year we’d hire 10 to 15, and this year we’re closer to four or five,” said Sydney Rieckhoff, chief executive of the Cedar Rapids, Iowa-based company. “We’re definitely seeing more thoughtful spending,” she said, with companies placing smaller orders for client and staff gifts.

It has been a good year for most of America’s biggest companies, with surging profits and enthusiasm for artificial intelligence propelling stocks to record highs. But for many small businesses, it has been just the opposite.

At small businesses, which are unable to withstand economic headwinds as easily as their larger counterparts, years of high inflation, increasingly cautious consumers and tariffs are weighing on earnings and prompting cutbacks. Over the past six months, private firms with fewer than 50 workers have steadily shed jobs, according to payroll processor ADP, cutting 120,000 in November alone. Midsize and, especially, large firms have continued to add jobs.

Cumulative change in employment since Dec. 2024, by firm size

Typically, in early December, Almost Famous Popcorn would have been staffing up for the holiday rush, when the gourmet popcorn company does 60% of its sales.

“In a normal year we’d hire 10 to 15, and this year we’re closer to four or five,” said Sydney Rieckhoff, chief executive of the Cedar Rapids, Iowa-based company. “We’re definitely seeing more thoughtful spending,” she said, with companies placing smaller orders for client and staff gifts.

The growing divide between the fortunes of small and large businesses mirrors the divide that has emerged over the past year between low-income Americans and their high-income counterparts. That split among categories of consumers is exacerbating, according to the Federal Reserve’s latest compilation of economic anecdotes from around the country, known as the beige book. “Overall consumer spending declined further, while higher-end retail spending remained resilient,” it said.

The growing divides are also related: Workers at small businesses tend to earn less than those at large companies. And the increases in stock-market wealth stemming from the rally in shares of large, public companies accrue mostly to the rich.

“We’re seeing two different economic realities on both the consumer and the business landscape,” said Bank of America Institute economist Taylor Bowley.

Giant, well-capitalized businesses such as Amazon.com and Nvidia generally have had a very good year. Net income for the large, publicly traded companies in the S&P 500 was up 12.9% from a year earlier in the third quarter, according to LSEG..... 

....MUCH MORE
* This dynamic has been one of our guiding principles for investing in the 2020's. 

April 2023 - HBR—From Pareto To Hyper-Pareto: "AI Is Going to Change the 80/20 Rule"

This type of information advantage is more and more accruing to the biggest and richest of corporations. It is a type of rich-get-richer advantage akin to the flywheel effect.

And related, now that we see what is happening, what, if anything, should society do about it?

...Much more important than the direct monetization of big data is the strategic advantage it can bestow over time.
In a winner-take-all economy, as in a horse race, small differences in superiority are rewarded all out of proportion to the actual advantage. A top thoroughbred may only be a couple fifths of a second faster than the field but those two lengths over the course of a season can mean triple the earnings for #1 vs. #2.
In commerce the results can be even more dramatic because rather than the 60%/20%/10% purse structure of the racetrack the winning vendor will often get 100% of a customer's business.....
February 2024 - The Hyper-Pareto Distribution Of Profits Is Happening Right Now (plus an anniversary)

It's not some cutesy management* fad or pop insight like "Business secrets of Genghis Khan."

To the rich go the profits and internalizing that fact makes the rest of this portfolio construction/fund management/investing stuff easier to conceptualize and execute.

And AI is accelerating the already extant dynamic....

Just to reiterate, every incremental advantage that a company can afford does not affect income production in isolation. They accrete in sometimes unforeseeable combinations:

How to Think About Companies: "Advantage Flywheels"
A very handy conceptual framework first posted after the start of the U.S. lockdowns, April 2020. Schools were closed so it seemed natural to link to a superb mini-MBA module.  
Eat your heat out HBR....

 *****

As artificial intelligence comes more and more to the fore, the advantages accruing to those companies that can afford to make use of their data and custom train the machines will act as advantage flywheels that shift the distribution of profits from the normal Pareto: 80% of the loot goes to the top 20% of businesses to perhaps as much as 95% of all the profits going to the top 5% of businesses.

I didn't really mean the "eat your heart out HBR" line.

Here's the Harvard Business Review on this very point:
HBR—From Pareto To Hyper-Pareto: "AI Is Going to Change the 80/20 Rule"

July 2025 - "The 'new normal' of growth stock dominance"

What our five years of blather regarding advantage flywheels is all about.....

***** 

"Analyzing the deepening divide in learning capabilities between a few corporate giants and the rest of the world." (plus advantage flywheels)

"America's Biggest Firms' Moat Is Becoming Impregnable" (TSLA; NVDA; GOOG)
The announcement at the end of August that Tesla was going live with their supercomputer — Elon Got Himself A Supercomputer: "Tesla's $300 Million AI Cluster Is Going Live Today" (TSLA)—reminded me of this piece at ZeroHedge, last month. We'll be back with more on Morgan Stanley's Tesla note later today but for now the TL;dr is "To the victor go the spoils" or "The rich get richer" or "Those who can afford a supercomputer will get closer to discovering the profitability (if any) of AI than those who can't afford a supercomputer."
In Nvidia's World, If You (and your company) Don't Have Money You Will Not Be Able To Compete (NVDA)

The advantage flywheels keep spinning and reinforcing each other to the point that the Pareto distribution of profits - 20% of companies reap 80% of the profits - is becoming Super-Pareto where 5% of the companies reap 95% of the profits and is approaching Hyper-Pareto at maybe 2% of companies reaping 98% of profits.

It all comes down to having the resources to keep up. 

I watched Mr. Huang give the keynote and it's all a bit much to digest before firing out comments that would make any sense at all so here are some of today's headlines to give a taste of what the intro paragraph is based on.

These are Nvidia's press releases via GlobeNewswire....

"Elon Musk says any company that isn’t spending $10 billion on AI this year like Tesla won’t be able to compete" (TSLA)

This.

This is such an important concept to grasp. It's the advantage flywheels, the rich get richer, winner-take-all reality of business in 2024....

And many, many more. 

Again: 

Posted by at