Away from the drama in the UK, it’s worth noting that US assets are pricing in further rate rises and the inverted Treasury yield curve has steepened, a worrying sign given that it is one of the most reliable leading indicators of recession.
With capital steadily being pulled out of risk assets in favor of money market funds, it isn’t surprising that growth stocks have taken another beating following a brief respite. The Dow Jones Industrial Average is now nestling in bear market territory once again.
US dollar strength is a plus point in relation to the country’s current account deficit, but it is weighing on profits for US companies that derive a high proportion of their earnings from overseas markets. Sterling’s fall from grace may be hogging the headlines, yet the dollar has been appreciating against a raft of other national currencies, particularly in those economies that still have accommodative monetary policies.
With the US third-quarter earnings season nearly upon us, it will be interesting to see if the continued rise of the greenback prompts downgrades to earnings forecasts. Naturally, this dynamic applies to the world of Big Tech/social media due to the globalized nature of the companies falling within that category.
The Nasdaq Composite has been effectively de-Fanged through 2022, losing nearly a third of its value since the beginning of the year as risk-off investors ran for cover. Apple (US:APPL) has been the sole outlier in that group, at least in terms of index outperformance. Nevertheless, the shares have still lost 17 percent of their value. Despite the pullback, the shares are now broadly in line with their five-year price/earnings to growth and enterprise value/Ebitda ratios, suggesting that they could come under renewed pressure, especially with consumer sentiment in the doldrums.
Aside from deteriorating economic circumstances, there is every chance that Big Tech stocks will continue to be faced with increased regulatory pressure, particularly if the Republican Party holds sway in the upcoming US mid-term elections. That’s because Republican lawmakers are intent on implementing curbs on perceived platform censorship as they take the view that social media platforms have become the de facto public square, regardless of their status as private companies.
US lawmakers recently pressed Meta (US:META) chief executive, Mark Zuckerberg, to hand over records relating to the company’s handling of a 2020 New York Post article containing allegations about the president’s son, Hunter Biden, after Zuckerberg revealed that an FBI warning about Russian propaganda contributed to the article’s suppression on Facebook at the time.
The regulatory risk doesn’t end there. In another self-inflicted wound, PayPal (US:PYPL) has come under renewed criticism for its practice of demonetising individuals and organizations that hold dissident political views, or at least those that don’t fall within the ‘Overton window’ of acceptable mainstream politics.
The matter recently came to a head after the payments service abruptly closed the account of a UK group that campaigns, ironically enough, for freedom of speech, but one that had been critical of the government’s lockdown policies, particularly in relation to schoolchildren. In response, a group of UK parliamentarians have approached the Financial Conduct Authority to consider whether new laws are needed to prevent organizations such as PayPal from shutting customers’ accounts without warning – even if they haven’t done anything that is unlawful.
All of this may be bound up with politics, but there could certainly be material implications for shareholders in these companies if legislation is tightened to prevent editorialisation or arbitrary cancellations of a service.
The debate over censorship, specifically politically motivated censorship, provided the impetus behind the recent Nasdaq listing of Rumble Inc (US:RUM), a video-sharing platform self-styled as “independent infrastructure designed to be immune to cancel culture”.
Whether the platform’s commitment to free speech will be enough to see it challenge the likes of YouTube is difficult to say but, compared with the Google subsidiary, it does offer content providers a much higher percentage of the advertising revenue generated from their uploaded videos. Rumble even launched an antitrust suit against Google in 2021, alleging that it favored YouTube in search results and on Android smartphones – the jury is still out on that one.
Rumble is obviously coming from a far lower base than Google, but its user numbers are growing rapidly, particularly among the Gen Z demographic, “one of the reasons that Big Tech platforms have stagnated” according to the platform’s chief executive, Chris Pavlovski. Be that as it may, the main risk to platforms is through amendments, or even a repeal, of the protections afforded under Section 230 of the US Communications Decency Act, ironically a legislative measure aimed at guaranteeing free speech.
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