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Mark Zuckerberg, the Facebook Inc. billionaire who looks like your neighbourhood barista, has finally stowed his customary T-shirt and squeezed himself into a suit and tie. It’s one telling sign of the tech sector’s sudden lurch into middle age.

The industry that has always projected an image of endless youth is now being forced to acknowledge it can no longer function as a perpetual adolescent. Mr. Zuckerberg’s testimony before the U.S. Congress this week may set the stage for firmer regulation of the online giants, from Facebook and Alphabet Inc. to Amazon.com Inc. and Netflix Inc.

He admitted to a Senate committee on Tuesday that Facebook had not done enough to ensure its tools were not misused, especially in the recent scandal around Cambridge Analytica, where data on millions of people were transferred without their knowledge. “It was my mistake and I’m sorry,” he said. He said he would have 20,000 people working on security and content review by the end of this year, and indicated he would not oppose further regulation and disclosure.

Facebook stock rose strongly during his testimony, indicating the market was relieved by Mr. Zuckerberg’s performance. But whatever happens in his follow-up testimony on Wednesday before a committee of the House of Representatives, tech’s brightest stars are being put on notice that the industry’s loose ways with data privacy are no longer acceptable.

For users, this is a good thing. For investors, though, the blessings are mixed. Any regulatory action that impedes the online giants is also likely to turn into a persistent drag on Wall Street, since tech stocks have been some of the market’s biggest drivers over the past few years.

As Mr. Zuckerberg strives to master a Windsor knot, some top analysts are now reducing their outlook for stocks in general and turning bearish on tech in particular.

“The bull is limping,” Lori Calvasina, head of U.S. equity strategy at RBC, said in a note on Tuesday. She cut her year-end target for the S&P 500 to 2,890 from 3,000, which implies only about a 9-per-cent upside from current levels.

She’s particularly negative on tech stocks, which she downgraded to an “underweight” recommendation, citing high valuations and the risk of regulatory action. In contrast, she upgraded utility stocks to “market weight” and says they’re the most attractive way for investors to play defence because of their attractive valuations.

The notion that stodgy utilities could suddenly be more attractive than tech superstars speaks to a surprising shift in attitudes that has taken place in recent weeks. The possibility of greater regulation in the tech sector is the most obvious reason behind the shift, but the new mood also reflects mounting worries about possible tariff wars and slowing economic growth.

“The [tech] sector fell more than any other during the corrections in the S&P 500 that occurred around the last three U.S. recessions,” John Higgins of Capital Economics wrote in a report on Tuesday. He expects the U.S. economy to slow next year and predicts cyclical sectors, which rise and fall in line with economic growth, to suffer as a result. “Among cyclical sectors, we think the information technology sector could fare particularly badly.”

The S&P 500 will end 2019 roughly 15 per cent below its current level, Mr. Higgins says. His reasoning is that economic growth is likely to hit a wall in 2019 “as fiscal stimulus fades and tighter monetary policy bites.” While he’s not yet predicting a recession, he does expect the Federal Reserve to be cutting rates in 2020 to try to prevent a downturn.

An economic slowdown bodes ill for tech, which dropped an average of 60 per cent in the last three U.S. recessions. To be sure, the sector is not as highly valued as it was during the dot-com era of the late 1990s, so it’s not likely to fall as much as it did then. Still, Mr. Higgins figures a deteriorating business climate will add to tech’s problems.

The full extent of those problems is still not known. Mr. Zuckerberg’s promises on Tuesday may have relieved the market for now, but his company has made similar vows before. Its history of promising to do better, and failing, suggests he shouldn’t put away his suit just yet.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 24/05/24 4:00pm EDT.

SymbolName% changeLast
GOOG-Q
Alphabet Cl C
+0.73%176.33
NFLX-Q
Netflix Inc
+1.74%646.75
AMZN-Q
Amazon.com Inc
-0.17%180.75

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