What next for Big Tech in the US
This is a big week for the US with a Fed meeting and a Congressional Hearing with the CEO’s of Facebook, Google, Amazon and Apple all scheduled for Wednesday. Arguably, the latter is of more importance to traders this week, as the Congressional Hearing will focus on the various anti-trust issues that each company is dealing with and is part of a year-long investigation into the tech sector’s anti-competitive behaviour. Since the tech sector is such a large part of the S&P 500 and makes up the majority of the world’s largest companies, financial markets are likely to react to this hearing.
Why tech is under scrutiny
This Congressional hearing is part of a fact-finding mission for US politicians. It will look at Google’s control of its advertising market, Apple’s App store policies, Facebook’s acquisitions of WhatsApp and Instagram and Amazon’s treatment of third-party sellers. The House Judiciary Committee is due to report back their findings in the next few months, which is likely to include some remediative action to try and make the tech sector more competitive. Since all of these stocks have reached record highs during the pandemic, the question for traders is, will the US government knock a big enough hole in tech companies’ revenues to warrant a re-evaluation of their stock prices?
Tech bubble 2.0
Already, some technical indicators are suggesting that the tech sector is looking overbought at current levels. This doesn’t take a genius to figure out – the stock prices of the tech titans are at record highs and are dominating the market. Amazon has a price-to-earnings ratio of 152.06, which compares to an average for the US retail industry of 19.3. It’s easy to argue that Amazon is likely to outperform its rivals in the retail industry in the medium term, but it is also a clear sign that this stock is overvalued and could be due a pull back. This is a big week for Amazon, as it also reports Q2 earnings on Thursday 30th July. As we mentioned in our note last week, the big thing to watch out for is revenues. If they disappoint expectations, then we could see Amazon’s share price drop in the short term. However, we doubt that some slightly lower than expected revenues will be enough to knock the air out of Amazon’s sales. What is a bigger risk for Jeff Bezos is political change. The Democrats have control of the House of Representatives, since they tend to be more scrutinising of business, then we expect the CEO’s of the US’s largest tech firms to get a rough ride on Wednesday, albeit from a distance, as this hearing will be held remotely at approximately 1200 EST, and 1700 BST. Added to this, countries including the UK are mulling an online sales tax, according to today’s papers, in a bid to save the UK high street and help them to compete against online retailers such as Amazon. Although the sales tax is expected to be relatively small, 2% has been touted for the UK, it does suggest that Amazon and other ecommerce firms will have to cough up as national governments pay down their Covid spending. Overall, if global political pressure continues to rise for the tech titans, then investors may need to consider a political premium for stocks such as Amazon, Google and Facebook.
Why will investors still buy tech
From the perspective of market behavioural theory, the prospect of greater political scrutiny, combined with record highs and elevated P/E ratios should trigger a wave of selling. However, these are not normal times, and market behavioural theory was devised before the tech revolution, so it may not even be relevant for these times. Hence, Amazon is up nearly 1.5% on Monday, even though there are some big events ahead this week. It appears that the market is still lusting after Amazon, and investors are willing to buy the stock on a dip, such as the $33 drop last week. Thus, don’t expect the tech bulls to let Amazon, Apple et al go down without a fight.
Europe vs. the US
There has been some talk about Europe’s star rising as the US sets, however, you underestimate the US economy at your peril. These are some reasons why we do not expect European stocks to outperform the US in the medium-term:
· The EUR750 billion stimulus package agreed last week by the EU still needs to be ratified by all EU member states. Stimulus and rescue funds are hard won in Europe.
· In the US, the Republicans are preparing another $1trillion of stimulus to bring before Congress this week.
· Don’t fight the Fed, the Fed stands behind the US economy, and they may announce something to boost the economy after a second round of lockdowns at their meeting this week.
· The pandemic may be under better control in Europe compared to the US, but Europe has not eradicated Coronavirus and another wave this winter cannot be ruled out.
· Europe does not have such a developed tech sector as the US. In Germany, the largest company is Volkswagen, it still remains well-off its 2019 peak. It is hard to see how the industrially focused companies in Europe will be able to outperform the US tech titans in the long term.
But, if we do see big tech come under selling pressure as the political scrutiny heats up, then we could see some pullback for the likes of Amazon, Google and Facebook, in particular, as there is a small threat that these businesses could be broken up or have to radically alter their business model as a result of the anti-competitive investigation by the US Congress. However, we expect any weakness in their share prices to be used as a buying opportunity for now. The real trouble for tech could be if Joe Biden and the Democrats win big at the US election in November. If the Democrats have control of the House and a President in the White House, then the tech sector could come under even more scrutiny in the coming years. To conclude, we’re not at peak tech yet.