'Big Tobacco' warning sends popular stocks sliding after bombshell ruling - here's what to do with your 401(k)

Two recent court rulings have answered longstanding questions about social media’s harmful impact on teenage users - and will likely have a big impact on your 401(k).

Juries in New Mexico and California found that social media platforms YouTube, Facebook and Instagram are addictive and harmful for younger users.

These household names are massive cash cows for their parent companies - Meta and Alphabet, which also owns Google, - and while the courts awarded relatively small amounts to plaintiffs this time, the longer-run implications are much more serious.

Shares of Meta dropped more than 8 percent the day after the ruling was handed down, while YouTube and Google parent Alphabet was down about 4 percent. 

Alvaro Bedoya, a former FTC commissioner, wrote on X that ‘a jury of regular people has managed to do what Congress and even state legislatures have not: Hold Meta and Google accountable for addicting young people to their products.’

Some investors are now asking if this is social media’s Big Tobacco moment.

How do cigarette companies relate to social media platforms? Two words: Giant lawsuits.

In the early 1990s, it emerged that tobacco companies had concealed the fact that they knew all along that cigarettes were not only highly addictive but also caused cancer - after decades of pleading ignorance.

The class-action lawsuits began, and by the mid aughts Big Tobacco had paid out hundreds of billions of dollars in settlements.

Now a huge cohort of individuals, local school districts and individual states are lining up to sue social media companies, alleging personal injury or claiming the products are hurting students. 

Alphabet and Meta are among the most prominent members of the famous ‘Mag 7’ group of stocks that now make up more than 30 percent of the S&P 500.

And these two stocks are without a doubt a big part of your 401(k) retirement fund, which is typically invested in assets like a S&P 500 index fund.

Shares of the two companies are down sharply over recent months, with Alphabet 16 percent below its most recent high and Meta down nearly 30 percent since its most recent high.

The companies’ AI woes are well known, but now they have weight from a storm of litigation to contend with as well.

Advocates for children harmed by social media draw strong parallels between tobacco and social media.

“For the parents whose children died as a result of social media harms, today’s verdict is a huge step toward truth, justice, and accountability,” Sarah Gardner, chief executive officer of Heat Initiative, which seeks to hold tech accountable for its harms, told CNN.

Gardner said that the California ruling was ‘social media’s Big Tobacco moment,’ when the harm the companies cause children was ‘proven in a court of law.’

In the case, a 20-year old Los Angeles woman said she became addicted to Instagram and YouTube as early as age six.

Social media companies have long been shielded from most legal threats by laws that make them immune to legal challenges regarding the content posted by users, but this case targeted site features rather than content.

The plaintiff claimed that social media features like push alerts and infinite scrolling dominated her childhood, leading to compulsive use, anxiety, body dysmorphia, self-harm and suicidal thoughts.

In their verdict, the jury wrote that both companies had acted with ‘malice, oppression or fraud.’