Why Worry About Regulation: Global Tech Stocks Are Back At Their All-Time Highs

With European regulators imposing restrictive new data privacy rules on American tech companies last month, and a seemingly endless string of scandals that have bombarded Facebook, the fact that tech shares are back at or near their all-time highs might set off red flags for some. After all, as we pointed out earlier this week,  the last time the tech sector was more valuable than this, relative to financials, was at the very peak of the Dot-Com bubble in March 2000.

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Yet, despite a few brief wobbles earlier in the year, nobody seems worried; in fact, investors are piling in...

Those disruptions demonstrated the outsize influence that technology has on the main benchmarks (not to mention on volatility as a whole). As we've pointed out many times, five stocks, Facebook, Apple, Amazon, Netflix and Google parent Alphabet - otherwise known as FANG + Apple - comprise some 25% of the value of the Nasdaq Composite. Tech stocks contributed 75% of the S&P 500's return in May, according to Bank of America. They now represent 26% of the index.

So, unlike most other sectors, when tech blows up, it's likely to take most of the market with it.

Still, despite those warnings - and the growing backlash against the sector - the Wall Street Journal pointed out on Friday that, while there are lingering concerns, most investors see earnings prospects as enough of a bulwark against trade or regulatory issues.

Just a few months ago, investors dumped big positions in tech stocks, wiping out $601 billion in market value from the S&P 500 tech sector alone in just three weeks. Their concern: more regulation and consumer scrutiny over data privacy.

Now, the Nasdaq Composite is hitting new highs and the MSCI World Information Technology sector is up 9.1% this quarter—currently outperforming the wider MSCI World Index by the largest margin since the dot-com era.

Although tech stocks wobbled near the end of the past week after a long streak of gains, better-than-expected first-quarter earnings and signs that U.S. companies are spending more on technology have helped the sector regain its dominant position.

Facebook Inc. shares traded around records this past week and Apple Inc. is again within striking distance of becoming the first $1 trillion U.S. company. Chinese e-commerce titan Alibaba Group Holding Ltd. and internet search giant Baidu Inc. have recovered from double-digit percentage declines earlier this year to rise 12% and 18% this quarter, respectively. Even Europe’s small technology sector has outperformed the Stoxx Europe 600 by 8 percentage points over that period.

The threat to the sector of increased regulation and a global trade war haven’t completely gone away. But convinced about these companies’ earnings prospects, investors poured $2.3 billion into tech-sector funds in the week through Wednesday, the second-largest weekly addition on record, according to EPFR Global, dwarfing any outflows in February, March or April combined.

Matthew Peron, chief investment officer of City National Rochdale, say the "tech worries were misplaced" and that "we're in a growth cycle, and ultimately I don't see trade or political dust-ups derailing what is a secular issue."

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And that feeling from mid-March that the uproar over data-privacy could have a lasting impact on tech's valuation? It's already gone, thanks in part to a strong earnings report.

"There was this feeling around data protection that this was the beginning of the end—no one would allow their information to be shared," said David Older, head of equities at asset manager Carmignac, who invested an additional $150 million into Facebook as it fell on a bet that its revenue wouldn’t be affected.

In late April, Facebook’s first-quarter results showed robust numbers for daily active users and advertising revenues. That has helped its shares climb roughly 27% since their low point in the selloff.

With everything from trade policy to regulation looking so uncertain, some say earnings are the only metric an investor can trust.

"What do equity investors feel they can really count on now? It’s not trade policy, not the [Federal Reserve], it’s earnings," said Dave Donabedian, chief investment officer at CIBC Atlantic Trust Private Wealth Management, who owns several companies in the tech sector.

In another alarming sign of just how lopsided analysts' opinions on tech are, just 3.6% of analysts now hold a "sell" rating on the S&P 500 tech sector, around the lowest level since 2013. Meanwhile, the 20 biggest global tech stocks have a combined market cap of $6 trillion. And the full impact of President Trump's tax cuts haven't even been felt yet.

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The tech boom hasn't been restricted to the US, of course.

Recent gains by Alibaba and Tencent Holdings Ltd., China’s two largest tech companies have exceeded some U.S. rivals. Both now have market capitalizations above $500 billion, placing them among the world’s top 10 most valuable companies.

Tencent, the world’s largest videogame publisher by revenue, is still 13% below its record, a dynamic that investors say is appealing.

"We believe Tencent has one of the most solid business models in China if not Asia overall," said Felix Lam, senior portfolio manager for Asia-Pacific equities at BNP Paribas Asset Management in Hong Kong.

Indeed, tech is ascendant even in Europe, where it comprises a much smaller sliver of the market. Software company Dassault Systèmes SE is up 35% so far this year and Swiss-based Logitech International SA is up 33%.

However, as most people (particularly baby boomers and Gen Xers) may soon be forced to remember, the aftermath of the previous 'different this time'-peak was pretty unpleasant.

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Comments

Mr Hankey Sat, 06/09/2018 - 17:45 Permalink

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Endgame Napoleon GotGalt Sat, 06/09/2018 - 19:14 Permalink

Woo hoo! It is not all that surprising to me. The top 20%—with their two, big, salaried incomes per household—can get more & more extra money from stock dividends from this industry that does design some products that are excellent in many ways despite the threat to civil liberties.

The industry employs a small number of citizens and noncitizens in the USA at towering wage levels, but what this sector’s dominance says to the umpteen-million, underemployed and out-of-the-workforce citizens of this country is you’re s*****d.

They are never going to employ more than a fraction of us, yet they dominate the market. Few other industries offer substantial employment, either, and yet, every mom must be accommodated to the hilt by government to take a job out of the economy in this era, rather than raising the children that she creates.

In this era—with its dearth of jobs that cover a full range of household bills—we will keep on seeing a hollowing out of the US middle class, no matter how much in 100%-free, Keynesian handouts is distributed to reward womb-productive sex.

The big stock toppling might come, though. The discontent created by the mass underemployment of citizens (and the lying about it) might end up spilling over into the streets, trickling up to elites by causing a destabilization of the markets. 

Maybe, elites, in their wisdom, can prevent it with the twin pacifiers of cash payouts to womb-productive citizens & noncitizens through the systems of womb-productivity-based, monthly welfare and the rigged, progressive tax code.

This is how elites pay the bills of womb-productive citizens in single-earner households. They likewise pay the bills of womb-productive legal & illegal immigrants who displace non-welfare-eligible, underemployed citizens from jobs.

The people who must live on earned-only income from the so-called jobs—the part-time, temp and gig jobs—are not too happy. Many of them are non-womb-productive, younger & older women who will just b***h in their misery, but a large number of them are young, strappin’ men that the elite hopes are so soy fed and so distracted by video games that they will not protest the withering of their futures too much.

The plan:

1) Feed the unmarried momma (users)—wielding the purchasing power from their $6,431 refundable child tax credits, their monthly welfare and the wages from their above-firing, low-wage, part-time, voted-best-for-moms jobs that keep them under the income limits for the programs—more baby-pic posting features, along with more targeted, baby-related advertising. Many are “poor,” as defined by government, but yet, they’ve got the money.

2) Give the mostly-married-at-this-point-in-time grandmas with the one, two, three or 4 streams of retirement income from government, investments and, in many cases, income from part-time jobs, more baby-pic-posting features, with advertising targeted to the Older Woman With Grandkids Who Buys Cheetos / Tide (not the pods) / JcPenny Sheets and other less-hip fare. She’s got the money.

3) Give the married mommas, wielding two bigly incomes per household and their recently doubled, non-refundable child tax credits, more baby-pic-posting options and targeted advertising that notes how much above-firing time off they have in their vacation-friendly, absenteeism-friendly mom-clique jobs. Give them increasingly sophisticated baby-pic show-off features and ads for resort hotels in Europe, fine furniture, home-renovation services, gourmet dining options and other ads for mom-pampering services that relieve the burden of overworked and under-funded parenthood.

This will do the trick to distract the many / many, losers in this win / win & zero-sum, rigged system from their disgruntlement. 

Speaking of elites, writing this comment almost made me miss the performance of the merit-based elite—Justify—as he crossed the finish line to get his well-deserved glory. Justify will be one of the only males to get paid for his part in siring offspring, not by Big Government, though. 

In reply to by GotGalt

arrowrod Sat, 06/09/2018 - 18:02 Permalink

Tyler's calling the end.  Time to buy.  Sell, Sell, sell...

$100 trillion floating around looking for returns.  Gold or ?

If you don't sell, you won't lose.  Unless tech dies.  Anybody thinking tech is going to die.  Back to the farm.  Plows pulled by horses.

Women washing clothes using a scrub board?  Weekly baths in the common bathtub, father first?

Stop with the false hysteria.

Endgame Napoleon arrowrod Sat, 06/09/2018 - 19:41 Permalink

In the last one-room apartment that I was able to afford, there was only one washer for the entire building. I had many conversations with a grad student from a fancy, private university who was also renting there about various washing machine alternatives. It was tiresome as h**, lugging the laundry down flights of stairs, time and time again, hoping that another grad student who hogged the one washer would not be occupying it. You would end up doing your laundry at 3:00 pm in the morning, then going to work at your low-wage, bully-den job the next day. And the noise: it was sooooo worth more than half of my monthly paycheck then, much less now, when I could not afford that “cheap” apartment in a safe area. I can easily see a future, where dual-high-earner parents—the talent—upgrade their lifestyles, going from ten, two-week, excused babyvacations per year to twenty, with a bump up in income for both parents from $300k to $400k. Strangely, automation never seems to reduce the value of the womb-productive talent. But employers value the hard work of most employees, especially the non-family-friendly enployees, less and less in the fake-feminist era. Most single, childless, non-welfare-eligible Americans of both sexes, whether they hold no degrees, bachelor’s degrees or even most advanced degrees, might easily end up returning to the days of hand washing and other luddhite practices due to a lack of funds for much of anything after the too-damned-high rent is paid. Whether they will give up their smartphones is another matter. It is a cheaper replacement for the TV with far more desirable features. About the only thing I would miss without a TV is C-SPAN. The privacy issues are troubling, but people are thinking that they had already used the internet so much before the extend of the privacy ceding became so obvious. In many ways, stoicism has set in among the non womb producers in the bottom 80%. 

In reply to by arrowrod

ZoroAustrian Sat, 06/09/2018 - 18:03 Permalink

please don't call social networking platforms, video entertainment production and distribution, or mass online retailing 'technology'.  They may use technology but technology is not their product.  These are consumer discretionary businesses, associated with recreation and narcissism, not productivity.  Calling them technology flatters their role in the economy, and flatters the economy overall.

Endgame Napoleon ZoroAustrian Sat, 06/09/2018 - 19:56 Permalink

I guess it means that people only have so much “discretionary” income to spend, so the growth is limited. But they sell advertising all over the world, heedless of the decay in the US economy. And for the hardware multinationals, the gadgets have to be replaced. 

The “tech industry” is a hodgepodge of companies, using advancements in computing to take over other industries or to provide parallel industries, like what Amazon’s self publishing fetches for investors versus the traditional publishing houses.

Many of those traditional industries probably never were bigwig stocks, but the tech-infused version of those same industries reaches more buyers worldwide, helping the stock investors, but doing zero to hedge poverty for the bottom 80% of Americans who face a weakening REAL economy.

In reply to by ZoroAustrian

buzzsaw99 Sat, 06/09/2018 - 18:06 Permalink

FANG is fucking everywhere.  If you own a tech fund, or a growth fund, or an index fund, or a target fund, or a fund of funds, if you invest with a hedge fund, or rely on a SWF, or the SNB, or the BOJ...  you own FANG, and lots of it.

 

looks so real Sat, 06/09/2018 - 21:12 Permalink

What longs are betting on is the fact that technology has never been this co-ordinate and pin pointed to address a deficiency of digital cash it can now fix any problem within a few minutes to a few days with astounding speed practical guaranteeing a one way ticket up on the dow. Only one thing can drail the utopia is a genuine shortage of a essential commodity even then things are so good and the people in charge are so smart they might still get around it. All hail Deep State.

Downtoolong Sun, 06/10/2018 - 07:05 Permalink

In the dot.com bubble, most startups were dependent on adoption and demand for ultimate success. This time, they’re big and powerful enough to just ram it down our throats and up our asses.

When you are the product, you don’t get to decide how it is used and abused.