Which Poses a More Significant Threat, The Vaccine or The Election?

After the market plummeted in early spring, the technology sector soared into the fall. Now that we are seeing some pullback on tech stocks, which is a bigger threat, a COVID vaccine or a new administration. Andrew Hecht shares his thoughts.

  • Technology stocks drop on Pfizer’s news
  • A return to normal would slow the ascent of earnings, perhaps dramatically at first
  • A new era of regulation is on the horizon
  • Tax increases will weigh on earnings
  • Sector rotation away from technology as the bull market in stocks continues

The stock market remains the place to be for investors. Warren Buffet once said, and I am sure he still believes, “Price is what you pay. Value is what you get.” He also said, “A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful.” Some people believe that Mr. Buffett is the greatest investor of all time. Others think he is nothing more than a master manipulator powered by massive capital and reputation. Whichever side you subscriber to, there is lots of wisdom in those two quotes.

Returns in the technology sector since the risk-off period in March 2020 have been nothing short of fantastic. The global pandemic has only hastened the ascent of the power, wealth, and attraction of the leading technology companies. On Monday, November 9, the stock market opened after President-elect Joe Biden declared victory over the weekend. Moreover, the news that a vaccine was on the immediate horizon pushed the stock market appreciably higher.

On the first trading session of last week, The DJIA rallied by 2.95%. The S&P 500 was 1.17% higher, and the small-cap Russell 2000 was up 3.7% at the end of the day. The technology-heavy NASDAQ ended the session with a loss of 1.53%. We may look back on November 9 as the day that a new trend emerged in the stock market. The technology sector rose to a level where value evaporated and greed crushed fear, a perfect environment for changing the guard in the bull market’s leadership in stocks.

Technology stocks drop on Pfizer’s news

Markets greeted the news from PFE with jubilance amid the ongoing discord over the Presidential election. While media outlets have called the election in favor of former vice president Joe Biden, the results are not official and face a slew of legal challenges. The control of the Senate is still up in the air and will depend on a pair of Senate races in Georgia in early January.

Meanwhile, the stock market surged on Pfizer’s latest news as it created light at the end of a long and dark tunnel created by the global pandemic.

Source: Barchart

At the end of last week, the S&P 500 index was 2.2% higher on a week-on-week basis from November 6-13.   

Source: Barchart

Meanwhile, the tech-heavy NASDAQ fell by 0.55% over the same period.

A return to normal would slow the ascent of earnings, perhaps dramatically at first

Technology turned out to be a savior during the global pandemic. It allowed for audio and visual contact between people to continue. Individuals remained in touch with friends and families, and businesses continued operations without the need for direct contact. Social media platforms like Facebook (FB), Zoom (ZM), Twitter (TWTR), and others soared.

Online shopping through Amazon (AMZN) and direct websites took the place of retail outlets. E-commerce has been growing by leaps and bounds. COVID-19 may have hastened the demise of retail businesses that do not have online capabilities. Downtime during lockdowns and social distancing caused people to remain at home. Steaming entertainment and gaming increased dramatically. The bottom line is the pandemic increased earnings for the technology sector and sent the NASDAQ soaring as money flowed into tech stocks.

Source: Barchart

The chart shows that the NASDAQ composite rose from the risk-off of 6,631.42 on March 23 to a high of 12,107.24 on November 6. The 82.4% rise outperformed all other stock market sectors. The S&P 500 rose by 66.3% over the same period.

Meanwhile, with a vaccine on the horizon, people worldwide are looking to get back to their previous lives. While the pandemic will have a handover and some of the changes will remain, it makes sense that the technology sector will lose some of the competitive edge created by the virus.

Increased personal contact would decrease the demand for social media for personal and business reasons. As people venture out to the businesses that survived the pandemic, it could detract from the tidal wave of online shopping. Less time may be spent streaming entertainment, and video games as people venture outdoors and to theaters and arenas.

While the leading companies will continue to benefit from a new normal that includes an increased role for technology, there are other reasons why technology companies could see their earnings decline over the coming months and years.

A new era of regulation is on the horizon

The power amassed by the technology sector when it comes to data has been in politician’s crosshairs on both sides of the political aisle in Washington DC and Europe. The leaders of the sector, including the FAANG stocks and others with massive market caps and cash hordes, are likely to find themselves under the hot lights of legislators that believe their growth puts them in a position where they impede competition.

The Trump administration believed in fewer regulations. The Biden administration will likely increase rules for many sectors of the economy, and technology is no exception. The appointment of a progressive Democrat as Treasury Secretary or at the helm of regulatory agencies would likely favor significant changes.

A new era of regulations would weigh on the share prices of the technology sector. Share prices rose to levels that assume that the environment in 2020 would continue in the coming years.

Tax increases will weigh on earnings

The new administration has made no secret that it plans to increase corporate taxes and close loopholes in the tax code. Higher taxes will immediately reduce earnings, which could cause share prices to fall. In markets, it is not unusual for the best-performing sector during one period to become the worst-performing sector in the next.

The main targets of the new administration and bipartisan effort to address the most influential US technology companies will be those with the largest market caps and cash hordes. The bottom line is that the sheer size of these companies puts them in a position where they stymie competition, whether directly or indirectly.

When it comes to the founders and CEOs of technology companies, higher taxes will have a profound impact. However, the billionaires can afford the higher tax rates for income and capital gains without missing a step. Even if Jeff Bezos’s net worth dropped in half tomorrow, he would still be worth close to $100 billion.

However, shareholders in AMZN and other technology companies will find themselves paying a more meaningful amount when it comes to their net worth. Tax hikes will eat away at the earnings power of the technology sector.

Sector rotation away from technology as the bull market in stocks continues

The stock market remains in bullish mode. A post-pandemic era and new regime in Washington DC could dramatically change the dynamics for technology companies regarding regulations, taxes, and control of data. Sector rotation in the stock market could favor other areas that have not participated in the bullish stock market trend over the past years.

We could see the energy and healthcare sectors rise from the ashes. While Democrats favor a green approach to powering the US and world, more regulations for fossil fuels could lower output and cause prices to increase. The leading energy companies could experience a long-overdue recovery.

Healthcare and insurance companies are likely to revert to the pre-2016 trends. Meanwhile, technology may have peaked in 2020. While the FAANG stocks and other sector members will continue to revolutionize the world, the sector experienced tremendous returns since March 2020, which are unlikely to continue in 2021.

Sector rotation during a bull market could take the wind out of the sails of technology over the coming months as valuations are at levels that could prove unsustainable.

The end of the global pandemic could wind up being a bearish watershed event for technology, with legislators and regulators pushing the power of the sector and price of the shares lower. Pfizer’s vaccine and the others that arrive on the scene could save millions of lives, but it could have a poisonous impact on the technology sector.

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FB shares fell $0.96 (-0.34%) in premarket trading Tuesday. Year-to-date, FB has gained 35.23%, versus a 13.35% rise in the benchmark S&P 500 index during the same period.



About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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