Big Tech Could Be In Big Trouble Next Year Under Biden—Even As Amazon, Apple, Facebook Prepare For Another Monster Quarter

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TOPLINE

A slew of big tech companies–including FAANG firms Facebook, Amazon, Apple and Google-parent Alphabet–are set to report earnings Thursday after the market closes, shining a light on a sector that’s been outperforming during the pandemic, and pre-election uncertainty as well. But the party for tech stocks could soon fizzle if Democrats sweep next week’s election.

KEY FACTS

Wall Street firms are expecting some of tech’s biggest names to beat bullish third quarter expectations, and Goldman Sachs says Alphabet and Amazon could continue to lead strong stock market gains in 2021; their shares have surged 16% and 71% this year, compared to a 5% gain for the S&P 500, but trouble could be on the way for tech giants.

These third-quarter earnings reports “will underscore the positive digital transformation tailwinds in the internet sector, and we have highest confidence in the media sector (Google and Facebook) for potential upside in the second half,” Bank of America analyst Justin Post said in a weekend note to clients.

The increasing odds of a Biden victory and “Blue Wave” election outcome, however, could stymie progress next year, adds Post: “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.”

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 earlier this month, House Democrats recommended Congress curb anticompetitive practices from Amazon, Apple, Google and Facebook by taking action, including “forcing tech companies to be broken up.”

“Robust results” from FAANG stocks and other big tech firms are likely to shine a “spotlight from a regulatory and antitrust perspective on just how well these tech giants are doing–and ultimately add fuel to the fire in the Beltway around breakup momentum,” said Wedbush analyst Daniel Ives in a Monday note, adding that the market risk–at least for now–seems to be contained.

CRUCIAL QUOTE

“The reality is that the strong are getting stronger with FAANG names such as Amazon, Facebook, Google and Apple as beneficiaries of the current environment and a dynamic that will be front and center Thursday night, which we believe will put further fuel into the tech rally moving forward into year-end with the elections and a potential Blue Wave creating more volatility over the next month for tech stocks,” a team of Wedbush analysts led by Ives said Monday.

WHAT TO WATCH FOR

Expect a preview of increased regulatory scrutiny on Wednesday, when–just 30 hours before their firms are expected to report earnings–the CEOs of Twitter, Alphabet and Facebook are slated to testify before the Senate in a hearing titled, “Does Section 230′s Sweeping Immunity Enable Big Tech Bad Behavior?“. Passed into law in 1996, Section 230 effectively gives giants like Alphabet and Facebook a shield against liability for the actions and words of private citizens on their platforms.

KEY BACKGROUND

Tech stocks have far outperformed the broader market this year, with the S&P North American Technology Sector Index, which counts Facebook, Apple, Amazon and Alphabet among its top 10 holdings, surging 29% in 2020 and the tech-heavy Nasdaq up 21%, compared to just 5% for the S&P 500. The four FAANG firms reporting earnings on Thursday have amassed a total market value of more than $5.5 trillion, nearly quadrupling from just two years ago. 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. Last week, the Department of Justice filed an antitrust suit against Alphabet–dealing a clear blow to the firm, but also posing a risk to other tech giants in its ecosystem, Bank of America said last Wednesday, 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.

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