Stock Market Comment: Factors to watch for US megatechs

• Nasdaq surged almost 38% last year

• 5 biggest tech stocks make up almost 20% of S&P 500 market cap

• Good business performance support rally in the previous year

• 3 factors to watch in 2020

• US100 bounces off the 9180 pts swing level

US stocks had a great year in 2019 with major indices rallying at a double-digit pace. The rally was fuelled by tech stocks with Nasdaq (US100) and NYSE FANG+ (USFANG) gaining 37.96% and 39.65% respectively. Moreover, 5 of the biggest tech stocks (Apple, Microsoft, Alphabet, Amazon and Facebook) are now responsible for almost a fifth of the S&P 500 capitalization. In this commentary we will take a look at factors that helped these stocks rally in 2019 and what investors should focus on in 2020.

What caused the 2019 rally?

A few factors have contributed to an impressive performance of the US techs in 2019. First of all, it should be noted that stocks were buoyed throughout the previous year by optimism coming from alleged progress in Sino-US trade talks and Fed rate cuts. Moreover, Fed launched quazi-QE in the second half of the year providing more support to the markets. However, what caused tech stocks to shine among the rest of the market? In most cases solid business performance was the reason. On the table below, one can see that most of the US mega-techs had a very good year and saw their earnings grow. To put this figures into context it should be noted that Nasdaq index earnings grew 0.78% YoY in Q1, 5.72% YoY in Q2 and 0.68% YoY in Q3 2019. 

While there were a few factors that boosted stock markets in 2019, solid performance of mega-techs can be explained with good business performance in most cases. Source: Bloomberg, XTB Research

3 factors to watch in 2020

Regulatory scrutiny 

Pressure to bolster regulation of mega-techs has been building over the years as the companies were reinforcing their monopolistic positions. The discussion over the issue is being held in the United States and one should not expect it to wane ahead of the 2020 presidential elections as it is a major theme for some Democratic candidates, like for example Elizabeth Warren. However, it should be noted that this risk factor was present in 2019 and it did not stop tech stocks from rallying therefore unless an action is taken by Congress, share prices could ignore it this year as well.
Affected companies: Facebook, Alphabet, Amazon, Apple

While support for Elizabeth Warren sank, discussion over breaking up mega-techs is still alive in the United States. However, unless action is taken, share prices may ignore the issue as they did in 2019. Source: Bloomberg

Cloud computing

Cloud computing is a new playfield for the major tech companies as demand for such services continues to grow. Microsoft and Amazon are current leaders in the sector and competition between the two is likely to draw an eye. Microsoft won a major contract from Pentagon last year but Amazon appealed from the decision. While Microsoft is the leader in a cloud sector (in terms of revenue), Amazon is closing in. Average annual growth rate for Microsoft cloud sits at around 15% for the previous 4 years while Amazon cloud sales grew at the pace of almost 48% YoY! Alphabet is also developing its cloud services but its cloud revenue is 4-5 times lower than Microsoft’s or Amazon’s.
Affected companies: Microsoft, Amazon, Alphabet

Microsoft was and still is a leader in the cloud segment. However, Amazon is closing in as its revenue rises almost three times faster. Apple was omitted on the chart due to limited data availability for the cloud revenue. Source: Bloomberg, XTB Research

Digital tax

Major tech companies often generate a bulk of its revenue online. This revenue was left untaxed due to its international nature. However, European Union aims to change the situation with the introduction of digital services tax at EU or OECD level. The plan was put aside for now but given threats from Trump to impose car tariffs if he does not reach a fair trade deal with the European Union, the topic could quickly return to the agenda. Earlier proposals pointed to a 3% tax rate on revenue generated in the European Union. This could be a major theme for US tech stocks in 2020.
Affected companies: Facebook, Alphabet, Amazon, Apple

Aside from the factors mentioned above, investors should not forget about regular market movers - earnings release. Most of the mega-techs will release reports next week. Source: Bloomberg, XTB Research

Technical look at US100

Bullish case for Nasdaq (US100) continues with the index marching higher along other Wall Street indices. A brief pullback that occurred earlier this week was halted at the 9180 pts swing level. The index is attempting to bounce from this area currently but faces resistance near 9200 pts handle. The next resistance levels can be found at the all-time high (9250 pts) and the topside resistance of the upward channel (currently at 9300 pts). When it comes to potential support, the nearest one is the aforementioned 9180 pts area. However, in case a break lower occurs, traders may look to 30-period EMA (H4 interval) as it halted a few dips recently.

Source: xStation5