NVDA NVIDIA Corporation

By James Mackintosh 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 29, 2018).

The highflying technology stocks had been ignoring rising threats for a while. Reality reasserted itself on Tuesday.

The immediate cause for plummeting tech shares was company-specific: Chip maker Nvidia Corp. halted road tests of driverless vehicles after an Uber Technologies Inc. test car was involved in a fatal crash, and Facebook Inc. CEO Mark Zuckerberg will be hauled before Congress. The announcements highlighted the risks to two of the biggest tech disruption themes, self-driving cars and social media.

But the market fall wasn't just about Facebook and Nvidia, or even self-driving cars and social media, although the themes mattered, with Tesla Inc. dropping more than Nvidia, and Twitter Inc. losing more than Facebook.

Instead, the market is waking up to an even broader threat: politics. It might also be sniffing another danger, from economics.

The political risk is obvious for Facebook, which stands at the unpleasant intersection of privacy fears and fake news. Facebook is accused of unwittingly aiding the manipulation of the U.S. election by Russian agents, of helping swing the Brexit referendum and, linked to both cases, failing to notice that the personal details of 50 million users had been snatched.

The arguments about who, what, where and why are far from being resolved, but Facebook highlights the forces gathering against tech investors. Disruptive companies are bound to make powerful enemies in old industries, but the tech companies have alienated many natural supporters among the wider public through their swagger, wealth and tax avoidance. Businesses that were once beloved by consumers for taking on the corporate establishment have become the corporate establishment in the eyes of many of their customers.

Cities and states were first to flex their muscles, forcing companies such as Uber and Airbnb Inc. to follow local rules and pay taxes. The threats now are much bigger.

The European Commission is pushing for a 3% tax on the revenue of internet giants, while pressure is increasing for "gig economy" workers to be treated as employees. The rush by companies to pull their ads from Facebook may be merely temporary, but it shows just how far the social network has slumped in public opinion and how much privacy is becoming an issue for Americans. In Europe, privacy rules have just been tightened again.

There is also a backlash to the sheer scale of many of the big internet companies. Earnest discussion among economists about the new monopolies is unlikely to lead directly to government intervention, but a change in public perception makes antitrust action more likely. Again, Europe has been leading the way by taking on Alphabet Inc.'s Google.

There is a further danger, from the economy. A stronger economy should mean more companies are able to demonstrate rising sales. Investors who want growth will be able to buy businesses exposed to the economic cycle, and the fast-expanding tech companies will lose some of their exclusivity in the minds of shareholders. The same point can be seen by looking at interest rates. As rates rise, profits far in the future look less attractive, which should compress the valuation of disrupters reinvesting all their earnings in the hope of future returns. If -- and it is a big if -- you expect the economy to improve and bond yields to rise, disruptive tech stocks should be less appealing.

Tech stocks rode high in the past three years, ignoring all these concerns as investors focused on the extraordinary profits and dominant market shares many were producing. Sentiment was overly positive, and the backlash was ignored.

It isn't always true that highflying stocks fall further, but it certainly was on Tuesday. Out of the top 100 stocks in the S&P 500 for the year to Monday, 39 were in the bottom 100 on Tuesday, about double what would be expected by chance. It worked the other way, too, with just over one-third of the bottom 100 stocks for the year in the top 100 on Tuesday, led by General Electric Co., the fifth-worst performer this year and the best on Tuesday.

In the short run, the drop means the overly fast upward momentum of the big tech stocks has abated, leaving them less exposed to further selling driven by technical factors, although Amazon.com Inc. led more falls on Wednesday after a report that President Donald Trump wants to target the company.

In the longer run, expect lots of contrition from tech company CEOs as they try to head off political pressure on the bottom line.

Write to James Mackintosh at James.Mackintosh@wsj.com

(END) Dow Jones Newswires

March 29, 2018 02:47 ET (06:47 GMT)

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