For US equities, domestic politics is an “unpriced” risk, according to Goldman.
I spent some time editorializing around that in “An Early Word On US Election Tail Risks.” Long story short, volatility markets don’t seem to be pricing an inconclusive election result, let alone any kind of societal upheaval in the event of a Trump loss.
There’s another unpriced risk: Legal proceedings against America’s tech monopolies.
A couple of years ago, Goldman set about determining whether the companies most vulnerable to “government intervention” were trading at a valuation discount. The answer was obviously “no.” These are, after all, companies which tend to trade at a valuation premium.
That said, “one case has gone to trial and three others have been filed” since Goldman’s original analysis, the bank’s David Kostin remarked, in a new note. Implicit was the notion that government action isn’t just a threat anymore, so perhaps the market will begin to price the risk.
Or perhaps not. Because on Goldman’s model anyway, there’s no evidence that the threat of antitrust proceedings is impacting multiples in big tech. See the figure below.
Goldman models valuation changes as a function of an antitrust proxy, equal-weighted index valuations, expected topline growth and changes in the bank’s balance sheet strength factor. Somewhat ironically, they use Google Trends to estimate the antitrust factor.
“If investors were pricing regulatory risk into the valuation of Big Tech stocks, we would expect to see a negative, statistically-significant coefficient for the antirust factor,” Kostin wrote.
There’s no such statistically-significant evidence nor, by the way, does the bank’s M&A basket indicate any durable (i.e., outside of the days when monopoly actions are actually announced) market concern about antitrust risk.
Does that mean there’s no risk? In a word, “no.” Because, again, this isn’t a hypothetical.
The simple table above lists the actual lawsuits, with which I assume most readers are quite familiar.
“One potential consequence of increased regulatory scrutiny on Big Tech is a reduction in prospective growth,” Kostin cautioned, adding that “curbing market share, restricting pricing power and blocking mergers are possible remedies a regulator could impose.”
Still, there’s scant evidence that company analysts are worried. And we all know bottom-up analysts are anxious to get out ahead of prospective risks, even if slashing price targets irks management. That’s a joke. Laugh. Because that’s the opposite of company analysts’ modus operandi.
“Arguably, if analysts were concerned about imminent antitrust intervention, they would be cutting sales and earnings estimates, which has not occurred,” Kostin wrote. Arguably.
Often the “forward looking equity market” does not react to any somewhat probable news until they are clubbed over the head with it.
This partly is because so much price action is now driven by volatility and trend-following algos.
As our Dear Leader pointed out last week when discussing why wars seem to have so little impact on vols which, by extension, means the markets.
Most algos are not forward-looking.
The active vs passive debate will find a winner soon enough with Berkshire being so cash heavy and algos being the shortest of term vehicles.
The government’s record has been a losing one, I think? Loss after loss, what was its last major win in an antitrust case – I can’t offhand recall.
https://www.reuters.com/legal/us-keeps-losing-antitrust-court-battles-few-expect-pullback-2022-10-04/
https://www.nytimes.com/2023/07/11/technology/lina-khan-ftc-strategy.html
There is the theory that DOJ and FTC are winning by losing, but that seems too subtle for investors much less algos.
https://www.skadden.com/insights/publications/2023/04/quarterly-insights/are-the-ftc-and-doj-losing-antitrust-battles
The coming decision in US vs Google could revive investors’ respect for the government – or sink it entirely.
You could also argue that investors are recognizing antitrust risks, by looking at the relative multiples of the mega techs.
MSFT is the highest multiple; it had its antitrust existential moment decades ago and recently beat the government in the ATVI case, so it arguably has no antitrust risk.
META settled its case and whatever the remedies were, they don’t seem to be too troubling, hence its tall multiple perhaps?
GOOG is the lowest multiple; its antitrust case is the nearest-term risk and if anyone is a monopoly in anything, it would have to be Google in search.
The AAPL and AMZN cases are recently filed so any risk and multiple impact would be years off.
The Google case just might impact Apple rather directly. Approx $20 billion of annual revenues is a placement fee from Google. That may be in play soon?
I wonder if AAPL could pivot and sell the search bar to MSFT at similar economics?
About all you can do is be prepared to react.
In my bubble all of the tech folk say they don’t use Google to search, but just have the Chat GPT window up. I wonder how prevalent this is and if it would skew Goldman’s numbers.