As the broader market rallies to new highs on the prospects of a Democrat-controlled government–and massive new stimulus measures–a slew of big tech companies, including FAANG firms Facebook, Amazon, Apple and Google-parent Alphabet, are posting losses Wednesday, shining renewed light on the regulatory scrutiny that could tank a sector that’s been massively outperforming during the pandemic.
Big-tech regulatory fears came to a head Wednesday after Raphael Warnock (D) defeated Republican Sen. Kelly Loeffler and Democrat Jon Ossoff declared victory in his race, with shares of Apple, Microsoft, Amazon, Facebook, Alphabet and Netflix all falling–between 0.4% and 2.1%–while the S&P 500 and Dow Jones industrial average each soared roughly 1.5%.
“To be blunt, the blue sweep of Georgia is a clear negative for big tech,” Wedbush analyst Dan Ives said about the Wednesday tech selloff, warning much more regulatory scrutiny and “sharper teeth around FAANG names” should now be expected.
“The Democratic Party has become increasingly critical on Internet company market power, with more liberal members, such as Elizabeth Warren [D-Mass.], of the party calling for breakups or utility-like regulation,” Bank of America analyst Justin Post said in a note immediately before the election, adding that a “Blue Wave” election outcome could stymie gains for media giants like Google and Facebook.
Increased scrutiny from a Democrat-controlled Congress would likely include heightened regulation over the use of personal data, according to Post, but it could go much further: In a 450-page report released in October, House Democrats recommended Congress curb anticompetitive practices from Amazon, Apple, Google and Facebook by taking action, including “forcing tech companies to be broken up.”
In a late-morning note, Vital Knowledge Media Founder Adam Crisafulli said that big-tech names are holding up well Wednesday despite the clear underperformance, though he adds current sentiment makes it “hard to imagine tech being able to trade well this week.”
Reacting to the likely Democratic victories, 10-year Treasury yields shot up past 1% for the first time since the pandemic started, notes Independent Advisor Alliance Chief Investment Officer Chris Zaccarelli, adding that higher interest rates are likely to hurt tech shares more than other stocks given their typically high-priced nature relative to earnings.
“While momentum for business model breakups of FAANG names have been gaining steam over the past few years within the Beltway and European Union, it lacked any political strength to make significant changes outside of political grandstanding events,” Ives says. “This all changes now in the eyes of Wall Street with the risk of business model scrutiny from tech giants Amazon, Google, Apple and Facebook now in a brighter spotlight, which adds more risk to the overall tech sector.”
Though the race between Ossoff and Republican incumbent David Perdue is still too close to call, markets have already been unraveling some of the gains and losses priced in under expectations of a split Congress–an outcome many experts agreed was a best-case scenario for stocks thanks largely to political gridlock hindering tax hikes and heightened corporate regulation.
What To Watch For
Expect ongoing debate over whether Congress should repeal Section 230, which was passed into law in 1996 and effectively gives giants like Alphabet and Facebook a shield against liability for the actions and words of private citizens on their platforms. President Donald Trump has fought hard (and fruitlessly) to overturn the legislation during his term, but Congress has been actively probing leading tech CEOs to determine whether the protections “enable big-tech bad behavior.”
Tech stocks far outperformed the broader market last year, with the S&P North American Technology Sector Index, which counts Facebook, Apple, Amazon and Alphabet among its top 10 holdings, and the Nasdaq each surging more than 40%. The S&P, meanwhile, climbed 14%. The monolithic growth has drawn intense scrutiny from lawmakers on both sides of the aisle, with Warren, for example, saying in early 2019 that “big tech companies have too much power–too much power over our economy, our society and our democracy.” That tension could be reaching a tipping point now that Democrats are poised to take the House, with bipartisan support for at least some regulation highly likely. The Trump administration’s Department of Justice filed an antitrust suit against Alphabet in late October–dealing a clear blow to the firm, but also posing a risk to other tech giants in its ecosystem, Bank of America said at the time, adding that Apple gets about $10 billion in incredibly high-margin revenue from Google each year that could account for about 10% of the firm’s earnings.
The five FAANG firms have amassed a total market value of about $6 trillion, roughly quadrupling from just two years ago.