'Very, very severe headwinds’: The threat to bust up Big Tech is giving some experts painful flashbacks to the financial crisis — and one has stopped buying those stocks entirely

facebook ceo mark zuckerberg

  • As calls to regulate or break up US tech giants increase, Wall
    Street sees a resemblance to past situations in which massive
    companies faced years of scrutiny and difficulty.
  • Senator and presidential candidate Elizabeth Warren said
    recently that Facebook, Google, Amazon, and Apple should be split
    up to increase competition.
  • Some experts now say the companies are in for an extended rough
    period. One money manager explained to Business Insider why he
    stopped buying those four stocks entirely.

With Big Tech squarely in the government’s crosshairs, some on
Wall Street think that years of pain are coming for social media
companies like Facebook
and other longtime market favorites like Google.

Pressure on such firms has been ratcheted up following Senator
and presidential hopeful Elizabeth Warren’s recent
calls to break up Amazon, Facebook, Apple and Google
. Other
candidates are likely to go after the companies as well, leading to
new regulations that these experts say could send costs climbing
and drive down their profit margins and stock multiples.

“When government regulation starts to look at a sector, it just
looks at the biggest ones,” Michael Antonelli, a market strategist
at $130 billion Robert W. Baird Private Wealth Management, told
Business Insider by phone. “These stocks are going to have very,
very severe headwinds.”

The current situation in mega-cap tech reminds experts like
Antonelli of the antitrust
issues that Microsoft faced
 from 1998 to 2001. The software
giant was accused by the Department of Justice of holding a
monopoly and engaging in anti-competitive practices.

A judge initially ruled that Microsoft be broken into two
separate entities, and only after a long appeal process did the
company finally reach a more palatable settlement. But Microsoft’s
stock struggled for years, failing to surpass its early-2000 peak
until 2016.

Read more:
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the last stock market bottom, a $160 billion investment chief
explains why traders should be getting very worried

There are also flashbacks to the scrutiny faced by big banks
after the 2007-08
financial crisis
. It was their dangerous lending and investing
behavior that absorbed much of the blame after the economic
meltdown. Some big-name bank stocks still haven’t fully recovered
their losses from that period. Even after the crisis ended, tighter
regulations restricted their growth for years.

This pessimism carries potentially grave implications for the
stocks market. After all, the four giant companies targeted by
Warren are among the market’s biggest winners over the
decadelong bull market
.

But while Warren is singling them out because of their size and
reach, Stifel Nicolaus money manager Chad Morganlander says other
tech companies are also in trouble.

Morganlander is specifically referring to other social media
stocks like Snap
and Twitter,
which he says might struggle as both the government and the general
public get more critical of how
the companies gather and handle their personal data
.

“The consumer backlash as well as regulatory backlash could
create intermediate to long term headwinds for many of the social
media platforms,” Morganlander, who oversees a $2.5 billion
portfolio, told Business Insider.

He said he’s avoiding those stocks because investors are
projecting years of strong profit margins that may not come to
fruition. If new regulations force them to get more active in
moderating potentially harmful content, those expectations might
become very hard to reach, Morganlander said.

Read more:
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Jessica
Melugin
, associate director of the center for technology and
innovation at the libertarian Competitive Enterprise Institute,
said intervention by the government will frighten potential
investors and reduce earnings. Since profit
growth
has been the foremost driver of stock gains over the
past 10 years, that could spell bad news for the overall
market.

“Innovating for consumers drives profits in the marketplace,”
she wrote by email. “When you displace the profit motive with other
sociopolitical goals, like helping smaller competitors, innovations
for consumers will slow.”

Stepping outside the social media realm, Morganlander also
argues that Google and other companies that traffic in user data
will also have to make some big adjustments.

“The good old times of gathering personal information and
selling it to third parties, I think, is in the latter innings,” he
said. “Eventually either business is going to make a responsible
decision or regulators will make that decision for them.”

Amid the worrying comparisons, Morganlander and Antonelli say
investors should consider rotating out of the industry into less
scrutinized areas. In fact, they think that might actually be a
positive thing for the broader market.

“They face stronger headwinds than restaurants or software or
any of these other kinds of places investors can go,” Antonelli
said.

SEE ALSO: ‘Another
break point may be coming’: On the 10th anniversary of the last
stock market bottom, a $160 billion investment chief explains why
traders should be getting very worried


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'Very, very severe headwinds’: The threat to bust up Big Tech is giving some experts painful flashbacks to the financial crisis — and one has stopped buying those stocks entirely