The stock market has almost never been as reliant on the technology sector as it is today.
And suddenly, Big Tech is suspect — pressured by regulators, barraged by public backlash and under fresh scrutiny by investors who've spent the past few years paying aggressively for a digital future that is, all at once, looking less clear and bright.
This leaves the market in a tricky and vulnerable spot as the major indexes undergo a "compound correction" — a second trip down toward the recent February lows after last week's loss of 5.8 percent for the led by a nearly 7 percent drop in big-cap tech.
The "keep it simple" optimistic case for owning mega-cap tech leaders all the way up was about the extraordinary value of natural dominance in the connected economy.
Jim Cramer's brilliant FANG mnemonic for Facebook, Amazon, Netflix and Google parent Alphabet captured four companies riding inevitable-seeming growth, power and customer adoption that married "win-win" user-supplier relationships to "winner-take-most" network economics.
Now, dominance is coming to be seen as a potential liability. This is not just about Facebook's comeuppance after user data was mishandled and used by political consultancy Cambridge Analytica.
Nasty market action always writes its own narrative, of course. But there's a way of telling the story of last week's flight from tech as a moment of collective recognition that Big Tech is under assault: Facebook delivers successive apologies that fall flat as #DeleteFacebook goes viral.
The government lawsuit to block AT&T's takeover of Time Warner started — and even if AT&T wins, it'll be because it pointed to the dangerous power of Facebook and Google as competitors. Meantime Broadcom just got blocked from buying Qualcomm. Oh, and a self-driving Uber car killed a pedestrian, casting doubt on just how soon the promised AI-directed future might arrive.
It's interesting to note that the market had already been differentiating between the digital-ad duopoly of Facebook/Alphabet and e-commerce leaders Amazon/Netflix.
The former duo run free, frictionless digital eyeball auctions — using any and all data within grasp. Customers of Amazon and Netflix make affirmative decisions to pay for goods and services, with the AI used mostly to serve up the next thing consumers actually want.
Facebook, Amazon, Netflix, Alphabet - 6 months
Remarkably, just a few months ago the main concern among Facebook investors was whether the platform — in its vast benign power — would go too far in reducing news and ad flow to improve the user experience.
With the hostile attention on Big Tech, deserved or merely a scapegoating exercise, it's easy to see how these companies might be moved to downplay their influence, avoid bold acquisitions and go slower on new market entries.
The way this all would immediately bear on tech investments would be to compress the sector's valuation. Until last year, the tech bulls were correct that the Nasdaq's market leadership was supported by stupendous sales-and-earnings growth by FANG and FANG-like companies (Adobe Systems, Nvidia, Apple, Salesforce) rather than speculative froth.
Yet the froth did start to build up in the latter part of 2017:
The Nasdaq-100 index stretched to a 23 percent premium to the broad market by late January. If this relationship simply returned to its seven-year average premium of 10 percent, it would probably thwart the broad market's progress for a while.
The upbeat take on the flip side: The S&P 500 excluding tech is as inexpensive as it was around the 2016 election before the market took off — though it's still a good bit pricier than at the last dramatic market trough in early 2016.
Facebook, no surprise, has gone farthest so far in surrendering its premium P/E. At 21 times projected profits for the next 12 months, the stock's never been "cheaper" since its April 2012 IPO. As recently as two years ago, its P/E was double the S&P 500's; now its 1.3-times as high.
Of course, the market is almost surely going to reduce expectations for profit margins over time. Facebook will hire thousands more people to help protect user data and filter ads and content. The business will become far less "virtual."
Anthony DiClemente, an analyst at Evercore ISI, said last week that ad-tracking services showed no reduction in advertiser interest as the data scandal unfolded. Yes, growth rates were down slightly both for Facebook and search ads on Google from blistering rates of a year ago. But for the moment, the business impact remains more expected than real.
The impact initially could well be more on investor psychology than the bottom lines of tech companies for a while. The case for tech was so pervasive and flexible for a long time. Economy slowing? Buy Big Tech for its sturdy organic growth. Tariffs threatened? The internet giants use no steel and don't sell much in China anyway. Rates going up? FANG has a massive net cash position and will buy back stock with unlocked overseas earnings.
Now, with tech a quarter of the S&P 500 — and 30 percent when Amazon, Netflix and Booking.com are added from consumer discretionary — it's more of a two-sided story.
Quantitative strategists at Bank of America Merrill Lynch noted two months ago that actively managed funds were already reducing their tech "overweight" bets — yet it remained the "most crowded" sector. This condition has probably eased further, but the weakness last week contributed to a sense there was "nowhere to hide" from a market sell-off that has already dropped more than 100 S&P 500 stocks at least 20 percent off their high.
Is this a case where a cleansing market correction is never quite complete without the "glamour stocks" being knocked off their perch — so maybe this downturn is running its course? Or are we witnessing the old Wall Street story that bull markets run into serious trouble when the "generals that have led the bulls" charge start to succumb?