Four Reasons for Tech Bulls to Start Worrying

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The results of the Georgia Senate runoff elections are in, with Democrats poised to claim victory and stock markets cheering the news. There were exceptions: Some of the biggest technology stocks — including 2020 darlings Facebook Inc., Apple Inc., Amazon.com Inc. and Google parent Alphabet Inc. — slipped in trading Wednesday. There are good reasons to suspect this is more than a momentary blip.

The all-but-certain victories in Georgia will give Democrats control of both the White House and Congress, which may in turn add muscle to regulatory and legislative efforts aimed at reining in tech giants’ power and market dominance. There’s that, but more as well. Here are four reasons tech bulls should start worrying: 

Antitrust Legislation: Last fall, a House antitrust subcommittee wrapped up a more than yearlong investigation nto Big Tech with a set of recommendations for stopping practices it said allowed these companies to abuse their power and stymie competition. A Democrat-controlled Congress raises the chances that these recommendations — from increased funding for antitrust agencies to lowering the bar for proving mergers are anticompetitive — will become law. At a minimum, this means increased oversight, but it could also force deeper changes that could put a check on growth at these behemoths.

Stepped-Up Regulation: While increased scrutiny of the most powerful technology companies was likely this year no matter what happened in Georgia, Democratic control of the Senate means the Biden administration will not have to compromise as much on cabinet appointments. (Already on Wednesday, reports surfaced that President-elect Joe Biden was tapping former Supreme Court nominee Merrick Garland for attorney general.) If this results in more progressive policy makers and regulators, it might lead to the Department of Justice and Federal Trade Commission taking harder lines in lawsuits that are already pending against the tech giants. 

Taxes: A Democratic Congress increases the likelihood of passing Biden’s agenda. Most important for business is his plan to raise the corporate tax rate to 28% from 21%. A 7 percentage point increase in annual taxes would take a serious bite out of after-tax earnings for all companies, but it would have a larger potential impact on stocks of more growth-oriented technology companies because most of their value comes from profit streams further out. Smaller aggregate earnings potential compresses valuation multiples.

Rotation: A unified government is widely seen as a catalyst for more aggressive fiscal stimulus and a greater tolerance for running bigger federal deficits. This could lead to a faster economic recovery and rising interest rates. Both developments would again be more negative for technology names. A big part of the sector’s outperformance last year came from the so-called safety premium trade, in which portfolio managers rotated out of traditional sectors into technology because of lower solvency risks. This could easily reverse as economically sensitive value stocks become more attractive. Further, rising rates lower the present value for future earnings, especially for growth stocks.

At the end of last year I wrote how the technology giants wouldn’t be able to top 2020, when profits boomed and shares soared. It looks as if that is already happening.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.

©2021 Bloomberg L.P.

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