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The S&P 500 retested its correction low on Monday, falling -2.2% for the day.[i] The correction narrative has shifted again over the past week, with Tech sector fears now center stage—a rerun of last summer’s FAANG[ii] freakout. This time, regulatory concerns seemingly dog the fab five, which is giving life to a latent fear surrounding the sector for years. While that might seem like a sensible sentence given the chatter surrounding the F (Facebook) and one of the As (Amazon), we think the connection falls apart when you search for logical reasons these issues should infect the broader sector—never mind the whole US equity market. This seems like a classic case of investors looking for causes to justify volatility, a typical correction trope, rather than a negative fundamental shift for the sector.
Near as we can tell, there are three main issues here—the most infamous being Facebook and its privacy-related stumbles. We won’t bore you with a recap of the issue at hand, which amounts to sociology and some investors apparently not understanding the company’s business model until mid-March. Nor will we hazard a guess at the company’s future—we’ll leave that one to the sell-side analysts. Rather, we will simply ask a question: Even if regulators decide to clamp down on data protection and privacy rules in an attempt to avoid a repeat of the Cambridge Analytica scandal, what is the likelihood that this impacts the vast majority of the Information Technology sector? Most of these companies are selling software, hardware or tech-related services. Facebook does none of these three things—instead, it sells users to advertisers. Heck, six months from now, Facebook won’t even be a Tech company. It will be in the Media & Entertainment industry, which will live in the new Communication Services sector. Extrapolating broad Tech regulatory risk from its foibles seems illogical.
Equally bizarre, in our view, is categorizing President Trump’s tweets about Amazon as evidence of broad Tech regulatory risk—and not just because the company technically lives in the Consumer Discretionary sector. The concern seemingly stems from one speculative article saying the president “would love” to use antitrust laws to clip the company’s wings and his ensuing Tweet storm about Amazon’s relationship with the US Postal Service. It all rather reminds us of when investors read way too much into his tweets about Boeing and Lockheed early in his presidency. For all the handwringing, nothing changed. Plane orders weren’t canceled. Furthermore, the executive branch has precious little power to intervene here, whether with Amazon or any company. Yes, the Justice Department could sue on anti-trust grounds, as they tried with Microsoft nearly two decades ago, but this would be glacial and widely discussed. So would any new regulations Congress might consider, which likely encounter significant gridlock. Oh, and might we point out that Amazon’s CEO owns The Washington Post, a frequent target of the president’s ire? It seems entirely possible that investors are unfairly extrapolating Trump’s beef with one man as an industry-wide risk. Or maybe this is Trump’s way of taking action to reverse the USPS’s chronic losses[iii]—take a hard line to open contract renegotiation with a huge shipper targeting higher rates. This, after all, is the approach Trump outlined in his magnum opus, The Art of the Deal. We don’t engage in speculating about what is really going on in politicians’ heads, but we think these alternate theories are worthy of consideration.
Concern number three—overseas regulation impacting Apple and Google—might seem more relevant. The EU proposed a digital tax that would clamp down on multinationals who domicile in one EU nation (namely, Ireland) to minimize their tax burden. Instead, it would tax revenues in the country they are earned. Number-crunchers estimate this tax, if enacted, would hit big Tech firms to the tune of about $6 billion annually, which sounds big until you consider that it would amount to a few hundred million for each firm—pocket change compared to their total earnings and revenues each year. Also, there is a big IF here: Like all big EU tax changes, this requires unanimous member-state approval. Low-tax jurisdictions like Ireland and Luxembourg are not exactly fans of the idea. For now, the likelihood that it gets off the ground and starts biting Tech firms seems low—and if it does eventually pass, again, it is tiny. It takes trillions of dollars’ worth of deleted economic activity to cause a global recession and wallop a bull market. A tax amounting to $6 billion in penalties doesn’t come anywhere close.
When headlines hype stuff like this, we think the best thing investors can do is sit back, relax, and think about what will and won’t drive sector-wide profits over the next 12 – 18 months. Do so, and not only will you probably find that broad regulatory risks remain low, but there are a lot of positive drivers to boot. Firms continue spending to upgrade IT systems—software and hardware alike. That in turn benefits all the firms up and down the technology supply chain. Strong export orders in Taiwan, a key link, suggest IT-related demand remains robust. Cloud computing and mobile usage are marching onward and upward. These factors, not regulatory rumblings, should matter most to Tech stocks over the foreseeable future.
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