The rise that we’ve seen in US stock markets since the March lows owes as much to the outperformance of the US tech sector, as it does to the US economy in general.
Not only have we seen Apple, Alphabet, Amazon and Microsoft achieve $1trn valuations, but the likes of Walmart, Target, Best Buy and Williams Sonoma have hit record highs in their share prices in recent weeks.
The disruptive nature of the US tech sector and the number of smaller tech companies who have completely changed the nature of the way we live and work has helped the global economy to overcome the challenges thrown up by the economic dislocations brought about as a result of the pandemic.
The success of companies like Zoom, DocuSign, Okta, Slack Technologies and, more recently Snowflake, in helping drive the shift in how the global economy works should not be underestimated. It has prompted significant flows of capital into a sector that has generated elevated expectations of longer-term growth potential.
How could a Biden victory affect the US tech sector?
The bigger question as we head towards what could be a seminal moment in US politics, and the election of a new president, is what effect a Biden win might have on the continued domination of the US tech sector when it comes to stock market returns.
The increased participation of US retail traders by way of trading apps like Robin Hood, has also been a significant driver in the way US markets have performed in recent weeks, with the overriding mantra one of, in the words of a 1988 pop song, 'The only way is up'.
For the last few months, the various CMC share baskets have given a decent insight into how these trends have been playing out, with big gains for the Big Tech basket, which has the likes of Apple, Alphabet, Facebook, and Microsoft, but also includes smaller-chip companies like Intel and AMD, and has outperformed the S&P 500 by over 20% in the last 12 months.
The emergence of collaborative technology, as well as streaming and gaming, which until the end of last year had more or less tracked the S&P 500 week by week, also illustrates this change, from tracking the S&P 500 (black line) to outperforming it.
Tech sector performance vs US SPX 500 – Cash
Source: CMC Markets
As we look ahead to the upcoming election, one of the main questions facing longer-term investors, who have had to navigate the unpredictability of the Trump presidency, is what would four more years bring as opposed to a Joe Biden/Kamala Harris presidential ticket.
As a general rule, investors tend to prefer the status quo, however given the changes thrown up by the pandemic, the next four years are likely to be replete with change. The big question is where these changes are likely to come from, and more importantly how much can we expect in terms not only of central bank stimulus, but fiscal stimulus as well?
Policy action around the US tech sector
One of the key themes from the Democrats over the past four years has been rising levels of unease about how the big tech companies have ever-increasing control of our everyday lives, in terms of big data, and the security of that information, along with how much tax they pay on their huge levels of profits.
This unease has already manifested itself in speculation over what could come about as a result of a Biden win, with some chatter that parts of the tech sector could be split off. It was only a year ago that Facebook CEO, Mark Zuckerberg, was pushing back on suggestions that Instagram could be hived back from Facebook, along with WhatsApp, over concerns they’ve become too big and ubiquitous.
Kamala Harris has already been a vocal critic of the tech companies on a number of issues, and in the Democrats 'Build Back Better' plan, it’s probably safe to say that in the event of a Biden win, the tech sector is likely to be in the frame for much stronger policy action on competition policy, antitrust enforcement, privacy and cybersecurity.
This is likely to mean a much higher enforcement mechanism for privacy breaches, as well as content management which could be considered discriminatory against minorities. As part of the Democrats economic plan, we could also see increased protections in terms of the employment of staff, which is likely to add to the overall costs of business.
It’s also likely that we will see the imposition of higher corporate taxes, along with the closure of a number of loopholes, which allow companies to minimise their tax liability.
Renewables could continue outperformance
While the tech sector is likely to feel nervous about a Biden win, renewables could well continue their recent outperformance. A green new deal has been regularly touted by Democrats, who have never made any secret of their dislike of the big oil companies in the US, who have done little to prepare themselves for the big shift that is coming away from oil and gas towards much greener energy.
This unpreparedness is manifested in the share price performance of the Oil & Gas share basket, which along with a weaker oil price has seen sector valuations fall by over 50% year-to-date. This is unlikely to improve under a Biden presidency, notwithstanding the fact that Exxon Mobil, Chevron and the rest of the sector have invested so little in the shift towards renewables.Source: CMC Markets
It’s notable that our Renewable Energy basket has been the best performing sector, containing the likes of Enphase Energy and First Solar, to name but a couple of 18 technology and energy companies that could do well in the upcoming shift to more sustainable sources of power.
All in all, as election day approaches, we could see significant outflows from some sectors of the stock market that have done well, to others that may benefit in the event of a Biden win.