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S&P 500's Five Leadership Stocks Including Apple, Facebook Ought to Count Antitrust Intervention as 'Greatest Threat'

05/10/2021 01:47

05:46 AM EDT, 05/10/2021 (MT Newswires) -- S&P 500 market leadership stocks such as Apple (AAPL) and Facebook (FB) face the greatest fundamental risk from a potential intervention of regulators and rising rates, according to a research note from Goldman Sachs.

With the exception of Microsoft (MSFT), the other four stocks that collectively account for 21% of S&P 500 -- Apple, Amazon (AMZN), Alphabet (GOOG), and Facebook -- face a "laundry list of legal battles and investigations" over their market power and competitive practices, Goldman analysts including David Kostin said in the note to clients. This list includes commercial litigation involving the US Department of Justice, and Federal Trade Commission antitrust lawsuits, and Congressional probes.

"Recent Biden administration appointments suggest some risk of a stricter regulatory regime and tighter antitrust enforcement," Kostin said in the note. "Our year-end 2021 S&P 500 index forecasts assume these companies generate sales and earnings in line with consensus expectations" and, therefore, implicitly anticipate that "antitrust actions have no major impact."

In the past, low rates have supported valuation of high growth, long duration stocks but that could change going forward. Higher duration increases sensitivity to a change in interest rates. The recent trend of rising interest rates could undermine returns especially for the five leadership stocks, whose collective market capitalization stood at 18% at the peak of the dot.com bubble in 2000.

Goldman rates strategists forecast that 10-year US Treasury yields will rise by 34 basis points to 1.9% by the end of 2021. As yields rose sharply from November through March, the five leadership stocks underperformed the S&P 500 by 7 percentage points.

"All five FAAMG stocks have above-average duration compared with the Russell 1000, meaning they are especially sensitive to moves in long-term interest rates," Kostin said.

Additionally, the proposed tax reform plans by President Joe Biden to raise both corporate and capital gains tax rates also represent possible sources of risk for the five technology behemoths, the research note said.

Assuming a 28% domestic statutory rate and 21% tax rate on foreign income, the collective effective tax rate would rise by 7 percentage points to 24% and would decrease consensus 2022 joint earnings by 9%.