Do Tech Stocks Face a Heavily Regulated Future?

America's leading tech companies have become global powerhouses in the recent years, expanding their dominance into new markets, displacing traditional industry leaders and landing themselves at the top of the Street's favorite investments as they continue to post stellar growth and double-to-triple-digit returns. In light of tech's multiyear run, and as fears of heightened government regulation around the world threaten future prospects, one analyst expects the sector to lag the broader market. (See also: How Bears May Fuel Stock Market's Recovery.)

Bank of America Merrill Lynch chief investment strategist Michael Hartnett issued a report Sunday in which he argued that big tech will experience a similar sell-off on a long overdue increase in regulation, much like the pressures faced by the tobacco industry in 1992. He also pointed to the regulation piled onto the financial sector in 2010 following the 2008 financial crisis and the scrutiny faced by the biotech industry in 2015 as examples of how "waves of regulation can lead to investment underperformance."

Technology is the least regulated industry sector, according to Hartnett, with just 27,000 regulations versus 215,000 for manufacturing and 128,00 for the financial sector. The note is part of the analyst's larger list of reasons to reduce holdings in technology stocks in 2018, and marks his 10th and final statement.

Increasing Pressure

Hartnett's prediction comes as tech giants such as Facebook Inc. (FB) and Alphabet Inc. (GOOGL) face criticism over their use and protection of consumer data. On Tuesday, Facebook Chief Executive Officer Mark Zuckerberg is expected to testify in front Congress regarding the social media giant's headline data crisis in which Cambridge Analytica allegedly took information on 87 million users without their consent to aid the Trump campaign in the 2016 U.S. presidential election. On Monday, search giant Google's YouTube platform came under fire as advocacy groups banded together to file a complaint to the Federal Trade Commission (FTC) regarding the firm's alleged violation of a federal law protecting children's privacy. 

While information technology has gained about 25% over the most recent 12 months, leading the broader S&P 500 Index, which is up 11.5% over the same period, big tech players such as FAANG component Facebook have tested correction territory. 

Shares of the internet giants could fall further as pending U.S. and EU regulations, such as a hike in online sales tax collection, threaten to eat away at 4% of tech revenues, according to BofA. Harnett also recommends taking caution with tech for other reasons, including their reliance on foreign revenue as trade tensions increase, as well as signs of a major bubble, noting that U.S. internet commerce stocks have returned more than 600% in seven years. (See also: YouTube Facing Kids' Privacy Concerns.)

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