Prepare for the election

Overheard

• "I am turning good at excuses like someone I know very well :)" — SoftBank's Marcelo Claure agreed to Masa Son's plan to postpone the close of a WeWork tender offer, using whatever excuse necessary.
• "Let's hit profitable growth first, and we'll then revisit the IPO plan." — WeWork CEO Sandeep Mathrani said the company plans to try to go public again.
• "Our working hypothesis, which might be disproven, is that September 2, 2020 was the top and the bubble has already popped." — David Einhorn thinks tech stocks are in an "enormous" bubble.
• "If the disputed transaction falls through, FRL will go into liquidation." — Future Retail lawyers reportedly told an arbitrator that if Amazon succeeds in blocking its asset sale to Reliance, it could liquidate.

The Big Story

What the election means for tech stocks

Next week's election is one of the most unpredictable in recent memory — and depending on the eventual outcome, markets could have dramatically different reactions. No one knows for sure how markets would react to each eventuality, but there are some good guesses flying around. Here's what could happen to tech stocks under each possible scenario.

"A blue wave would likely prompt us to upgrade our forecasts," Goldman Sachs analysts wrote earlier this month, noting in a separate report that it would have a "modestly positive net impact on the trajectory of S&P 500 profits." Democratic control of the House, Senate and White House — seen by many as the most likely outcome — would make a stimulus package in January much more likely, giving the economy a much needed boost.

• Looking further ahead, a Democratic government would likely spend heavily on big infrastructure projects, including climate change, potentially benefiting green tech companies.
• There are some downside risks, though. Higher taxes could reduce company earnings, but it remains to be seen if that would have an impact next year or in 2022 or 2023. "If the Democrats were to implement both fiscal stimulus and tax reform in 2021, we estimate these policies would have largely offsetting effects, leading to S&P 500 EPS being roughly in line with our status quo 2021E estimate but lower thereafter," Goldman analysts wrote. But Mark Mobius, who thinks the market's forming a "double top," also thinks markets will suffer in the short term on a Biden win.
• The possibility of tech regulation looms large, too — though investors continue to seem not that bothered by it. One regulatory change could actually be a boon for tech stocks: A Democratic shakeup of the FCC could lead to revisiting net neutrality rules. That would be bad for telecom stocks, but potentially good for internet companies.

A Republican sweep would also probably be good for stocks, given the possibility of further tax cuts. But markets might get jittery on a lack of stimulus and the general uncertainty of another four years of Trump.

• Tech could be particularly hard hit, at least in the short term: As JP Morgan analysts wrote this week, tech stocks dramatically underperformed the wider market after Trump's surprise win in 2016.

No one wants a divided congress under Biden, though. Under a Biden presidency, "control of the Senate would mean the difference between substantial fiscal expansion and fiscal gridlock," Morgan Stanley analysts said. JP Morgan analysts, meanwhile, characterized the situation as "stagnation," with no further stimulus expected. Bear in mind, though, that tech will be less affected by that than other sectors — though, as we saw in earnings this week, tech stocks are unlikely to come out unscathed (more on that in a minute.)

The worst outcome, though, may be no result. "Investors may have initially feared a Blue Wave, but a delayed or contested election outcome is even more unsettling," say UBS analysts. There's precedent for that: As The New York Times notes, stocks fell more than 8% after the contested 2000 election. This time round, with the possibility of civil unrest, things could be even worse.

• The chances of a result on Election Day itself are rising: A Florida win for Biden, in particular, would likely make markets comfortable enough to call the overall result. But Morgan Stanley analysts say they "still see 'election week' … as the most likely outcome," with a few days before we know who's won. And then, of course, there's the small question of whether Trump will actually accept the result.

So the best thing to prepare for might be volatility. That seems inevitable either way, because the election isn't the only thing roiling markets at the moment. As we saw with new lockdowns in Europe this week, COVID has absolutely not gone away.

• "The vaccine represents a more important factor than the election result for the path of equities," Goldman analysts wrote. To morbidly quote Keynes: "In the long run, we are all dead."

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Up to Speed

• Monday: SAP shares plunged on earnings. Twilio earnings beat estimates. Ansys bought AGI for $700M. Caixa said it's considering an IPO of its digital bank. ByteDance was reported to be in talks to list Douyin. Tokopedia reportedly raised $350M from Google and Temasek.
• Tuesday: Microsoft earnings beat expectations. AMD earnings beat expectations, and it bought Xilinx for $35B. Apple reportedly bought Vilynx for $50M. Vinted bought United Wardrobe. Krafton hired bankers for an IPO. Faire raised $170M at a $2.5B valuation. Eightfold raised $125M at a $1B valuation. Ordermark raised $120M from SoftBank. UBS announced a $200M fintech fund. The DOJ was reported to be investigating Visa's Plaid acquisition.
• Wednesday: Sony raised its profit forecast. Samsung earnings beat expectations. Pinterest earnings beat expectations. eBay earnings missed expectations. Root shares rose on listing. FunNow bought Tableapp. Scopely raised $340M at a reported $3.3B valuation. Whoop raised $100M at a $1.2B valuation. CoStar and private equity groups were reportedly bidding for CoreLogic.
• Thursday: Apple earnings beat expectations. Amazon earnings beat expectations. Facebook earnings beat expectations. Alphabet earnings beat expectations. Nokia cut its profit forecast. Panasonic earnings beat expectations. Spotify earnings missed expectations. Shopify earnings beat expectations. Activision earnings beat expectations. Marvell bought Inphi for $10B. Intel bought SigOpt. Juul reportedly cut its valuation to $10B. Polestar was reported to be in talks to raise $500M. Udemy was reported to be in talks to raise $100M.
• Today: Lufax is set to list, having reportedly raised $2.4B. Sony was reported to be considering a Crunchyroll acquisition.

Diving Deeper

Tech's doing just fine — for now

Too many companies reported this week to go into each individually (check out Source Code for a look at the big four), but here are some of the big trends.

• The ad market has roared back. Alphabet and Facebook's revenue growth is the definition of a V-shaped recovery, with smaller players such as Pinterest and Twitter also benefiting from brands' return to spending. Amazon's ad business did particularly well, growing around 50% year-on-year.
• Ecommerce continues to do well — but growth is slowing. Shopify, Etsy, eBay and Amazon's shares all fell after they released their results, with worries that growth will continue to dip going next year.
• Consumer electronics spending is holding up remarkably well. Samsung reported its highest-ever quarterly revenue, while strong Mac and iPad sales helped Apple grow revenue year-on-year, even without a new iPhone.
• I was wrong last week about the end of the COVID bump. Twilio continued to see huge growth, while — as Tom Krazit explains on Protocol — all the cloud providers posted pretty strong results.

But the good results weren't enough for investors. That may be because they were much more focused on the cautious outlook for the current quarter. SAP, reporting earlier this week, was a particularly grim example of that: Its shares plunged more than 20% on its forecast cuts. But while Big Tech's forecasts were less dramatically bad, they weren't cheery. As I mentioned above, tech isn't immune from the wider economy and worsening COVID cases: If things don't get back on track, people and companies may stop spending, and no one wins.

• Combined with renewed fears that Big Tech's in a bubble, tech stocks find themselves in a very precarious situation. As Bloomberg's Tae Kim writes, "valuations now leave little room for error." January's earnings season will be very interesting.

Coming Up

• Headlines will be dominated by the election on Tuesday. But there's a lot of other stuff going on, too: Qualcomm and Match report earnings on Wednesday, followed by Uber, Alibaba, Square, Cloudflare, EA, Take-Two and Roku on Thursday. Expect California's Prop. 22 to be mentioned at Uber's call.
• Ant Group is set to list on Thursday. Demand has been mind-blowingly huge: Retail demand in Shanghai alone was $2.8 trillion, while Hong Kong demand was so high it squeezed HIBOR.
• Oh, and there's a jobs report on Friday. Just in case the week wasn't tumultuous enough.