-
Valuations are at sky-high levels
-
Continuous innovation – Profits may face obstacles
-
China could take control if regulators take a hard line on technology in US and Europe
-
A powerful lobby in Washington DC
-
Moderate Biden administration will take light step amid fragile economy
The rise in tech stocks that started at the March low has been nothing short of amazing. Major tech companies have seen their market capitalization, influence, and power increase in recent months. COVID-19 was the worst health crisis the world has faced in a century. The virus has had a silver lining for tech companies. They provided the tools and services that allowed a certain normalcy to be maintained as people took refuge in their homes and isolated themselves. The coronavirus has accelerated the growth of the tech industry with the closing of retail stores, people working from home, and a new normal has emerged fueled by technological innovations.
Tech stocks have reached sky-high levels, but many market players continue to buy. The executives of these companies are facing a significant crackdown from government officials and regulators in the United States and Europe. They expressed growing concerns that data control has allowed an unacceptable level of influence. Hordes of liquidity and market capitalizations of over $ trillion create an environment in which antitrust issues hamper competition have surfaced as 2021 approaches.
Meanwhile, lawmakers and regulators face a no-win situation. Any significant crackdown that shatters technological leaders or hinders innovation can hand over the leadership role to the Chinese. China’s political structure allows monopolies because the nation has tight control over all aspects of its economy.
Valuations are at sky-high levels
Since the March low, major recovered tech stocks have hit new record highs and moved to levels where valuations predict a continued stream of earnings and a rate of growth. FAANG stocks, including Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOG), had a combined market capitalization of over 5.80 trillion at the end of last week. . All FAANG stocks have skyrocketed from the March low.
Invesco QQQ Trust (QQQ) owns a portfolio of the leading technology companies that make up the NASDAQ 100. Fund summary and top holdings include:
Source: Yahoo Finance
QQQ has approximately $ 130 billion in net assets, trades on average over 48.15 million shares every day, and charges an expense ratio of 0.20%.
Source: Yahoo Finance
As the chart shows, the QQQ fell from a low of $ 164.93 to $ 299.01 at the end of last week, an increase of 81.3%.
QQQ owns shares in major tech stocks, including FAANG and Tesla (TSLA) stocks. TSLA stocks were eight times higher than the March low at the end of last week.
Continuous innovation – Profits may face obstacles
Technological innovation will continue, but the trajectory and earnings growth will likely slow down. Expecting the same rate of share price appreciation would require unlikely profit levels in 2021 and beyond.
Increased regulation under the Biden administration and headwinds from the US Congress and the European Commission could weigh on earnings over the next several years. Some politicians would like to see major tech companies smashed into smaller pieces to foster more competition. Meanwhile, rising corporate tax rates and closing loopholes will weigh on profits. As the global economy continues to suffer from the global pandemic, raising prices to cover tax obligations is not an option for tech leaders.
We’ll continue to see new tech products and services that revolutionize our lives, but earnings could weigh on stock price growth after the incredible appreciation in 2020.
Rising taxes, regulations, and the potential for dissolution of larger companies could set the stage for a substantial correction in the tech sector. However, American and European politicians are likely to tread lightly for three reasons.
China could take control if regulators take a hard line on technology in US and Europe
When it comes to technology, China closely follows the US tech industry. Any government roadblock against US companies would only allow Chinese companies to play a dominant role.
The Chinese government has allowed entrepreneurs in the tech sector to flourish, but the government maintains a tight grip on the sector because its political system sees technological innovation as a matter of national security and its aim is to dominate in the industry. global scale. A perfect example is Amazon’s competitor, Alibaba Group Holdings (BABA).
While Amazon.com has a market capitalization of over $ 1.6 trillion, BABA is on the right track with its online and mobile commerce business. BABA’s market cap was at $ 742.2 billion at the end of last week. Chinese tech companies could challenge all US and European tech leaders over the next few years if regulators decide to crack down on the industry.
A powerful lobby in Washington DC
Tech companies have established a powerful lobby in Washington, DC and Europe to protect the industry. A Nov.21 article in The Guardian describes the power and influence of the lobby and its impact on the incoming Biden administration. The headline says it all: “If You Think Biden’s Administration Will Master Big Tech, Think Again.”
The president-elect has named former Facebook (FB) and Amazon (AMZN) employees to his transition team. Tom Sullivan, from Amazon, is headed to a senior position in the State Department. Mark Schwartz, also from Amazon, heads for a meeting in the Office of Management and Budget with Divya Kumaraiah from Airbnb and Brandon Belford from Lyft. These are just a few of the tech executives heading to government jobs in the Washington Ring Road.
Moderate Biden administration will take light step amid fragile economy
As the US economy suffers from the coronavirus and another massive stimulus package on the horizon, President-elect Biden and his team could call the dogs in the House and Senate over onerous regulations on the tech sector. Corporate tax is likely to increase, but if Republicans retain control of the Senate, it could temper increases for businesses in 2021 and beyond.
We’ll likely see a bit more regulation and higher taxes on the tech industry over the next couple of years leading up to the midterm elections in the United States. However, the makeup of the new president’s team suggests it will go lightly due to the fragile economy and corporate ties that are currently in the crosshairs of some politicians. Furthermore, ceding technological power to the Chinese is a matter of national security for the United States and Europe, which is a powerful argument for supporters of the status quo in the tech sector.
Want more great investment ideas?
9 growth stocks “to own” for 2021
Investors: we must be grateful! (Market Outlook and Trading Strategy Plan from Steve Reitmeister)
5 winning stock chart templates
AMZN shares were trading at $ 3,162.64 per share on Tuesday morning, down $ 5.40 (-0.17%). Year-to-date, AMZN has gained 71.15%, compared to a 15.41% increase in the benchmark S&P 500 over the same period.
About the Author: Andrew Hecht
Andy has spent nearly 35 years on Wall Street and is a sought-after commodities and futures trader, options expert and analyst. In addition to working with StockNews, he is a senior author on Seeking Alpha. Learn more about Andy’s story, as well as links to his most recent articles. More…