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Inside the Market Skepticism emerges ahead of earnings reports this week for Facebook, Amazon and Alphabet

Everyone knows the tech giants have grown huge. But few people realize just how huge.

Put it this way: Three of the most iconic names in technology − Facebook Inc., Amazon.com Inc. and Google’s parent, Alphabet Inc. – are together worth more than Canada’s S&P/TSX Composite.

Add in Apple Inc. and Netflix Inc. and the market capitalization of the group swells to more than the entire German stock market.

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The massive size of the FAANGs (for Facebook, Apple, Amazon, Netflix, Google) will ensure attention when three of them − Facebook, Amazon and Alphabet − report first-quarter results this week. But what’s particularly intriguing this earnings season is the hint of skepticism that’s beginning to emerge about what lies ahead for these gigantic success stories.

To be sure, it’s just a glimmer of doubt. Most analysts are still wildly bullish about the FAANGs.

But other indicators suggest caution is in order. Last week, Taiwan Semiconductor Manufacturing, a key supplier to Apple, warned it is seeing “weak demand from the mobile sector.” Apple’s share price promptly tumbled on worries that smartphone sales may be softening.

Some key investors have already begun to ease back on the big names in tech. Hedge funds reduced their positions in Facebook, Apple and Netflix over the past three months of 2017, according to Institutional Investor, an industry publication. The selling is noteworthy, because big hedge funds such as Appaloosa, Adage Capital, Tiger Global, SRS and TCI have been some of the most eager buyers of the FAANG stocks in recent years.

The hedge funds may simply be taking profits off the table. Or perhaps they’re finding the lush valuations on some of the FAANGs too expensive for comfort.

A more robust explanation, though, is that the sellers are growing concerned about the increasing calls for more regulation of the sector.

Recent U.S. congressional inquiries into the Cambridge Analytica scandal highlighted the vast amounts of personal data collected by Facebook and the other online giants. In Europe, measures such as the soon-to-be-introduced General Data Protection Regulation are attempting to crack down on how such information can be used.

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On top of that, there are growing questions about whether the FAANG penchant for disruption is a good thing for the economy as a whole. By now, for instance, no one doubts Amazon’s ability to put traditional retailers out of business. It’s gobbling up the sector, just as Alphabet eviscerated the newspaper business and its YouTube subsidiary played havoc with the music business.

Is this disruption a net benefit to society? Maybe not. One sore point is that ordinary people aren’t necessarily sharing in the payoff from the FAANG good times.

Consider Amazon. The online retailer is expected to report a 40-per-cent jump in first-quarter sales, to US$49.9-billion, when it reports results on Thursday. By any standards, that’s an astonishing rate of expansion for such a huge company.

Amazon workers, though, aren’t seeing much of the joy trickle down to them. The company said in a securities filing this past week that its median employee made all of US$28,446 in 2017.

At other tech companies, too, the biggest winners are a relatively small group of people. In the case of Facebook, for instance, the problem is not how much employees are being paid, but how few employees are being paid, period. Despite its ubiquitous presence, Facebook employed only 25,000 people this past year, according to Bloomberg data. By comparison, Merck & Co., a company with similar revenues, employed 68,000.

The numbers suggest FAANG companies may be qualitatively different than earlier generations of big corporate winners. For all their own issues, auto makers and oil companies created lots of middle-class jobs. The tech giants are not faring so well at that task.

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In part, that’s because they’ve become effective monopolies, protected by patents and economies of scale that prevent real competition, according to Mordecai Kurz, an emeritus professor of economics at Stanford University in California. The result, he argued in a recent editorial, is increased income inequality and large numbers of displaced workers.

“The current situation is not just deeply unfair,” he said. “If unchecked, it threatens to precipitate political strife and economic turmoil, with disastrous consequences.” He recommends much higher taxation of the new monopolies, with proceeds going to compensate workers in disrupted sectors.

You can, of course, take issue with Prof. Kurz. But when a professor at Stanford – not exactly a hotbed of socialist ideology – begins to propose such measures, it’s a sign that the intellectual climate is shifting and the regulatory environment may follow. Investors should pay attention.

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