If you’re looking for (or need) a short-notice bear narrative for a market high on AI optimism and generalized tech rhapsody, regulatory risk will always work.
I’ve penned some version of this story on so many occasions I can’t even remember all of the antagonists. Suffice to say they reside on both sides of the proverbial pond (i.e., both the US and the EU are pursuing various cases against big-tech), and hail from both sides of the political spectrum (Democrats are after the monopoly profits and Republicans are determined to exact a price for tech’s liberal biases).
Elizabeth Warren’s been after tech. So’s Donald Trump. And on and on. “Mo money, mo problems,” as Christopher Wallace put it. And tech has a whole-lotta money.
Given market concentration and the dependence of US equities on a handful of companies, almost all of which arguably constitute monopolies in one sense or another, it’s fair to ask if the regulatory push might ultimately have an adverse impact. After all, there’s a new lawsuit every other week (not really, but it seems like it).
The figure below, from BofA’s Michael Hartnett, suggests there’s plenty of scope for the US government to tax tech. (But only figuratively. Because in America we’re pathologically averse to literal taxes on corporations and the billionaires who run them, supply-side economics having worked so well and all.)
“Tech regulation’s getting noisier,” Hartnett wrote, in his latest, citing (obviously) the Justice Department’s antitrust suit against Apple, as well as FTC action against Amazon, along with everything going on in the EU.
He went on to remind investors that the Magnificent 7’s nearly a third of the index (the S&P, that is) and nearly two-thirds of stock gains over the past 12 months. Markets “love big tech ‘moats,'” Hartnett said.
What’s not to like if you’re a shareholder? These businesses enjoy a “monopolistic ability to protect margins, market share [and] pricing power,” and now they “control the AI arms race,” Hartnett wrote.
But don’t forget: The US government’s “broke” (that’s a joke, but it’ll play). If you ask Hartnett, $2 trillion of Magnificent 7 revenues in just 12 months is a “tempting target for regulators” given that governments are “struggling to pay their bills.”
The chart above, I should note, uses data from 2017. Hartnett was keen to point out that the average tax rate of Magnificent 7 companies was just 15% over the past year, compared to 21% for rest of the S&P 500. “Regulation and rates are the historic way sector bulls and bubbles end,” he added.
Coming from the background as a CEO of non profit organizations, I always find it interesting when free market personnel extol stocks with a huge moat – which means they don’t face much competition?
Don’t overlook the Florida bill, just proudly signed by Ron DeSantis, which seeks to force social media companies to only allow people 14 & over to use their sites.
This is a bipartisan concern, which the parents in our office roundly endorse.
But poor Meta will have to figure out how to enforce it. That might cut into margins! That’s unacceptable!
And to think that just a few years ago we all were ridiculing and criticizing China’s efforts to limit the time younger people could spend on gaming sites. Maybe they were on to something?
Well said Derek, social media is designed to corrode the minds of children, teenagers,…. and uninformed adults.
Some years ago I remember watching a stark portrayal of the Wannsee conference in Germany where the Nazis were seeking to forge the “Final Solution” to eradicate the Jews. Careful minutes were taken at this meeting and all copies were destroyed as the participants departed … all except one, and it was this transcript upon which the movie and a book were based. The thing that struck me hardest were the “work-arounds.” A few of those in attendance had dear Jewish friends, one committee member was actually part Jewish and so forth. The problem was how to kill all the Jews but not ones important to the Reich and/or its leaders.
Fast forward to today and the under 14 problem at Facebook and others. My main retirement gig is to serve as a reviewer of business case studies submitted to various publishers. A month or so ago I got a very nice case highlighting the struggle at Facebook, in particular, arising from proposals to cater to kids. An impression I got was that the argument about this topic was a key reason for the departure of COO Sandberg. At first, to avoid having to include children in the customer base Zuckerberg tried to open a revenue path using the so-called meta-verse. After billions in losses it became clear that this strategy was not going to solve the growth problem. So now kids are back on the table as the easiest way to to make a lot more money. But there are many problems with this direction, some ethical, some logistical, some operational, and so forth. Watching the struggles the company is having trying to find a possible win-win for the kid market is much like watching a re-run of Wannsee. Enter DeSantis with his mighty monkey wrench. This can only be fun to watch.
I sorta think this is important. Bipartisan and, from what I hear, very popular with parents with kids in middle school and those on both sides.
“Investors” will probably shrug it off and reassure themselves that the legal challenges will stretch out for years, But … how long will companies want to be seen in the courts fighting something so popular with parents?