The fate of the US equity market is now more closely tethered to the fortunes of the five largest companies than ever before.
“Coming into 2020, the five largest S&P 500 stocks accounted for 18% of index market cap, matching the share at the peak of the Tech Bubble in March 2000”, Goldman’s David Kostin wrote last month, on the way to noting that “since then, those stocks (Microsoft, Apple, Amazon, Google, and Facebook) have risen to account for 20% of market cap”. That figure rose higher still over the next couple of weeks.
By the time the S&P bounced 30% from March’s pandemic panic lows, the worst you could say for any of those five companies was that the shares were flat on the year. The rest of the market, collectively, was still down 13%.
To the extent Donald Trump cares about avoiding another rout in US equities in the months ahead of the election, he’d be advised to avoid saying (let alone doing) anything that might undercut the FAAMG stocks.
But this is Trump we’re talking about.
“The Radical Left is in total command and control of Facebook, Instagram, Twitter and Google”, Trump declared, during a Saturday Twitter marathon that included 32 tweets and retweets by lunchtime in Washington. The irony of making that claim in a tweet was apparently lost on the president.
“The Administration is working to remedy this illegal situation”, he went on to say. “Stay tuned, and send names [and] events”.
On Friday evening, The Wall Street Journal said Google will probably face at least one antitrust lawsuit tied to its advertising business in the coming months. Both the Justice department and a group of state attorneys general will likely file suits, The Journal reported, adding that the prospective cases “are well into planning for litigation”. The DOJ suit could come as soon as the summer, while the state case will “probably” come in the fall, sources said.
Google, as well as America’s other tech titans, have been under a microscope for years, and there’s bipartisan support both for regulation and antitrust proceedings, should evidence suggest the latter is warranted.
Trump’s grudge against Google and Facebook stems from his long-standing contention that the companies are engaged in a conspiracy aimed at overthrowing his administration. That, despite the unanimous conclusion of America’s intelligence agencies that Russia utilized sophisticated social media campaigns to assist his bid for the Oval Office. Trump’s allegations against Facebook seem even more dubious when you consider how adept his campaign is at wielding the platform to his advantage (legally).
Last year, Trump went so far as to regale the UN General Assembly with his theory about social media bias.
The president’s antagonism towards Amazon stems primarily from Jeff Bezos’s ownership of The Washington Post, which Trump has, on dozens of occasions, suggested shutting down. The one-sided war of words between Trump and Bezos has also drawn in the post office. In early 2018, reports suggested the president attempted to compel the US Postmaster General to double the rate the Postal Service charges Amazon. During a series of wild screeds around the same time, Trump accused the Postal Service of acting as Bezos’s personal “delivery boy”, and at one point went so far as to explicitly accuse Bezos of running a “scam” on the post office. The president has also demanded The Washington Post register as a lobbyist.
When it comes to Twitter, Trump has floated a variety of theories about the platform. “What they’re doing to me is incredible”, he told Maria Bartiromo (who has herself complained of “shadow banning”) during an interview last June.
At the same time, Trump has offered up a pseudo defense of America’s tech giants in the face of a European digital tax on the companies. Of course, that defense came prepackaged with the suggestion that the US should tax them instead.
The president’s remarks on Saturday suggest that any prospective advertising-related antirust suits against Google may be just the beginning when it comes to a crackdown on the same tech companies which have buoyed the market for years, and are now shouldering the entirety of the burden when it comes to keeping equities afloat.
Having already done their part (and then some) to keep a floor under the market amid the epidemic, these companies don’t have much further to run anyway – or at least not if you go by Goldman’s price targets.
Of course, Trump is hardly alone when it comes to adopting an antagonist approach to the tech superpowers. Elizabeth Warren wants to break some of them up, and, as noted above, there’s bipartisan support for some kind of action.
But Trump’s latest remarks suggest something wholly different – namely that the White House is angling to move forward with action that compels private companies to alter their business practices so that the executive’s agenda gets top billing. That is the stuff of autocracies. It is reminiscent of the approach China takes to social media. In other autocratic states, social media blackouts during periods of social unrest are commonplace, with Turkey and Iran being just two examples. Both Trump and Mike Pompeo have decried just such blackouts in Iran.
This comes amid explicit calls from Trump for Barack Obama to be hauled before Congress to account for unspecified crimes. The president’s supporters claim to have some idea of what “Obamagate” means (Trump has tweeted the term in all-caps on multiple occasions recently), but, when pressed, even he can’t explain it.
Below, for example, is what Trump told a reporter on Monday when asked to detail the alleged conspiracy:
Obamagate. It’s been going on for a long time. It’s been going on from before I even got elected, and it’s a disgrace that it happened, and if you look at what’s gone on, and if you look at now, all this information that’s being released—and from what I understand, that’s only the beginning—some terrible things happened, and it should never be allowed to happen in our country again. And you’ll be seeing what’s going on over the next, over the coming weeks, but I—and I wish you’d write honestly about it, but unfortunately you choose not to do so … You know what the crime is. The crime is very obvious to everybody. All you have to do is read the newspapers, except yours.
It would be comical if it weren’t coming from the president.
You might simply write this off as an election ploy. You could similarly dismiss the threats against Facebook, Google and Amazon. But considering William Barr’s unabashed approach to allowing the Justice department to be guided by the president’s personal agenda, it wouldn’t be wholly surprising if some of Trump’s more authoritarian impulses started to manifest in actual legal proceedings – or worse.
For market participants (Democrat or Republican), aggression towards Google, Facebook and Amazon is perilous. Especially at a time when bank stocks are under siege, energy names are struggling with the worst outlook for crude in history (recent improvements notwithstanding) and cyclicals in general are grappling with the deepest recession since the Depression.
To reiterate, market concentration is the highest it’s been going back at least three decades. Although there are myriad ways to measure market breadth, there is no recent precedent for the current level of concentration among the five largest names.
And when it comes to top- and bottom-line growth, where would it come from if you cripple the titans?
“Looking beyond this year, [our] analysts forecast FAAMG stocks will post 2019-2021 CAGR sales and EPS growth of 14% and 12%, respectively”, Goldman wrote earlier this month. “In contrast, consensus expects the other 495 index constituents will report growth of 1% and 2%”.
Mercifully, Trump has a decent relationship with Tim Cook. But that too has its limits, and could be strained if tensions with China continue to escalate.
The bottom line is that save Microsoft, all of the names which comprise the FAAMG acronym either are currently, or have been, on Trump’s bad side at one time or another during his first term in office.
This weekend, he threatened two of them directly.