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When yesterday’s Q2 results revealed the extent to which Big Tech has profited over the pandemic, it got me thinking - how would we have coped if lockdown had happened 20 years ago?
With online shopping still in its infancy, most of us would have had no choice but to mask up and face the high street. Friends Reunited was the closest thing we had to social media, Jeeves was still the best person to Ask for browsing the internet, and there were no video-calling or online streaming services to keep us occupied.
Our capacity to operate in a socially-distanced world has been made possible in large part by big US tech stocks, and five in particular - the so-called ‘FAANG’ stocks (Facebook, Apple, Amazon, Netflix and Alphabet, the parent company of Google) - have profited handsomely, between them inspiring one of the S&P 500’s best quarters on record. All this despite the US economy shrinking by a record-shattering 9.5% that same quarter.
Yesterday’s results, which revealed a 40% quarterly increase in Amazon’s revenues, jarred glaringly with the US GDP data, published only hours before. The question for investors now is whether this tech stranglehold is sustainable.
Big week for Big Tech
Apple, Alphabet, Amazon and Facebook’s Q2 results cut an unnerving reminder of their resilience after their chief executives faced a congressional hearing over their market power on Wednesday.
The accusations they faced before Congress reflected growing anxieties over both their practices and their dominance. David Cicilline, the committee chair, said: ‘simply put, they have too much power’.
It’s unlikely, as some have claimed, that this will be tech’s ‘Big Tobacco’ moment, where a series of hearings in 1994 resulted in a PR disaster and increased regulation of the tobacco industry.
Tech has entrenched its place in our lives more firmly than cigarettes, and its vices are less tangible. But there’s a growing sense that the Big Tech firms are bad for us, and the rising focus on ESG credentials will only drive momentum behind efforts to contain them.
Is FOMO blowing up a bubble?
Anxieties are not limited to Big Tech’s ethics - they extend also to its financials. The sector’s sheer size (Apple, Amazon and Microsoft alone now have a combined value greater than Germany’s entire economy) is fuelling fears that we are entering a tech bubble that sooner or later will burst.
The theory is bolstered by concerns over companies’ valuations. When we spoke to Scott Davis last week, manager of the JPM US Select Fund, he advised caution: ‘some of them are overpriced, in my mind, and some of them are not’.
Evidence of investor FOMO (fear of missing out) won’t help ease anxieties. Earlier this week, Bank of America Global Research found that 74% of 188 fund managers interviewed think US tech stocks are the ‘most crowded’ trade in the market (a record high for any trade). Still, that hasn’t stopped managers backing it - coupled with pharma, technology remains by far the US’s most overweight sector.
When the numbers so clearly point to the merit of tech and the failings of almost every other sector, investors are afraid of missing out - even when they acknowledge the market is overvalued.
Back to the future
Doubts over what a COVID-laden future looks like, and how it could cope without the support of technology, is propagating the idea that these companies will only expand. The truth behind that is, like the future, hard to tell. The habits we have fallen into over lockdown may now feel like a ‘new normal’, but they’re not necessarily permanent.
As Netflix’s results last week showed, people can only consume so much entertainment. We like the idea of a Netflix binge session, but when hours of streaming are forced upon us, our capacity to indulge has proved to be finite.
Nevertheless, yesterday’s Q2 results suggests that, for the time being at least, the tech leaders are here to stay. It reinforced another of Cicilline’s warnings: ‘these corporations already stood out as titans in our economy. In the wake of COVID-19, however, they are likely to emerge stronger and more powerful than ever before.’
Investors may wonder - is this the pride before the fall?
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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