Will Political, Regulatory, and Tax Threats to Big Tech Kill the Stock Market?
Technology stocks have powered America’s markets higher for more than two decades, including leading almost parabolic rallies on the heels of every selloff, correction, or bear market since 2009.
That certainly includes “Big Tech” powering equity markets higher off their coronavirus crisis lows.
But now mega-cap technology darlings face political, regulatory, and tax threats, possibly all at once.
Investors need to know what those threats are, what could happen to big tech companies, and how the stock market might fare if big tech leadership stocks falter, exposing the market’s weak underbelly.
While there are more than a handful of powerful U.S. tech companies whose stocks have been rising for years, investors and the financial press rightfully focus and report extensively on the handful of tech stocks known as the FAANG stocks and Microsoft.
The FAANG stocks are Facebook Inc. (FB), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Google (Alphabet Inc. (GOOGL)). Microsoft Corp. (MSFT) joined the gang of gapping-higher-darlings in 2016 when its stock became a powerhouse market mover, too.
With powerful “moats” around their businesses, expanding “ecosystems,” and extraordinary revenue, profits, and cash growth, the FAANG+M gang boast a collective equity value of almost $7 trillion.
So, what could stop them?
For one thing their size and command over their markets and competitors.
Big Tech Could be in Big Trouble
Prompted by politicians including failed Presidential candidates, Elizabeth Warren and Bernie Sanders, state regulators, the FTC (Federal Trade Commission) and the U.S. Justice Department are investigating big tech companies over their pricing practices, acquisitions, and “anti-competitive” behavior.
Google’s being investigated for its “abuse of power” in the market for digital advertising, as well as its dominance in search. Apple’s facing scrutiny over how it ranks apps in its Apps Store. And Facebook’s facing a probe into its ability to sway public opinion.
In a prelude to on-going investigations, the House Judiciary Antitrust Subcommittee is holding a virtual hearing on July 27, 2020 where the CEOs of Apple, Amazon, Facebook and Google will be publicly probed and possibly pilloried over their businesses size, reach, societal influence and profitability.
Across the pond the European Commission and European Union regulators are probing privacy practices and anti-competitive activities at the tech giants, as well as pushing a digital tax on them that could cost as much a $1 billion a year.
And, in an effort to blunt threatened American tariffs, the European Commission recently approved adding “services” and “intellectual property” to goods and products they can target for tariffs, with the stipulated purpose of bringing America’s big tech companies into the line of fire.
So far, big tech darlings, thanks to their deep pockets and extensive lobbying efforts, have sidestepped, if not blunted political and regulatory efforts to formally expose and upend some of their business practices.
But this is an election year.
Politics, Privacy, and China Are Ready to Knock Big Tech Down
That means politicians are going to attack the Trump tax cuts that “grossly” enhanced big tech’s profitability. It means privacy issues are going to be front and center. It means the influence these companies have, especially social media’s impact on opinions and voters, is going to boil over. And it means the size of these companies and how they disadvantage small companies struggling in the recession, is going to be painted across every “spread the wealth” banner everywhere.
And the European Union, desperate for tax revenue, is going to make a full court press for extracting what it can from American companies.
Unfortunately, that’s not all Big Tech’s facing.
Besides saber-rattling between the U.S. and China potentially impacting big tech’s range in China, the impact their rising stock prices has had on otherwise lackluster, if not failing equity markets, makes investors, analysts and even market regulators nervous.
Not to worry, at least not yet.
Big Tech earnings, starting with Microsoft today, are mostly going to justify their high valuations and their elevated stock prices. They will calm investors nerves, draw in even more capital, and lead markets higher still.
Unless of course their earnings are disappointing or rotten.
If mega-cap company earnings don’t beat estimates, don’t show reliance in the face of the pandemic, don’t justify their soaring stock prices, “not yet” may get here sooner than later.
Everything Relies on Earnings
On Friday I’ll tell you what’s going to happen to the market if Big Tech earnings are good, and what to watch out for if they aren’t and politics, regulators, and tax collectors act on their stated intentions.
There are tons of implications if Big Tech earnings come back weak, and I’ll lay them all out on Friday, but for now, I’d consider looking for some alternative options to pad your portfolio if Big Tech comes back with big disappointment.
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