2022 has been one of the worst times for tech stocks for the last decade. Most of the key stocks are at the lowest they have ever been for the last 3 to 4 years. Tech stocks which have been the most loved stocks especially since the onset of the pandemic are undergoing what some are calling a correction.
The Nasdaq index is down 15% from its November peak with stock prices of behemoths such as Apple and Tesla dropping by double digits. Some have even fallen 40% or 50% and more from their highs.
And which companies have been affected? Well, the effects have been felt throughout the tech sectors. Behemoths have particularly felt it.
As of Thursday, social media giant Meta stock price had plunged 23% as investors were startled by the sharper-than-expected decline in profit and a gloomy outlook. Other social media peers have even sold off in its wake. Pinterest and Snap which were due to report their earnings later in the day have slid 4.8% and 18% respectively. Twitter has fallen 3.8%.
Other popular casualties in the tech space include Tesla which has tumbled more than 9%, Nvidia 8.4%, Alphabet (GOOGL) by 5% and Apple (AAPL) by 3.9%.
And even though there have been a few signs of a rebound through the Nasdaq- 100 – tracks stocks of the largest players in the index, was still on track to open down 0.4%.
And why have these stocks fallen?
Most people are pointing to the Federal Reserve and bond yields.
According to minutes of a December meeting at the Federal Open Market Committee, the Fed is headed for earlier and faster rate hikes in a move towards more aggressive policy tightening. In line with this policy, the central banks both in America and Europe is set to shrink their balance sheet which has ballooned to nearly $9 trillion amid the Fed’s pandemic-era program of quantitive easing which adds liquidity to markets.
“We, and the market, found the tone to be more hawkish than anticipated,” said Mark Haefele, the chief investment officer at UBS Global Wealth Management. “The rate rise had begun to weigh on growth and technology stocks.”
Interest rate hikes, less liquidity in markets, and higher bond yields are all bad news for tech stocks. Elevated yields, in particular, tend to discount the present value of future cash flows—and the valuations of many tech stocks are reliant on the notion of profits well into the future.
“As tech has been the largest winner of the Covid-era, it seems reasonable for there to be a rotation …toward other sectors that have lagged as the Fed’s minutes allude to a healthy economy that may warrant a faster normalization of Fed policy,” said Kevin Philip, a managing director at Bel Air Investment Advisors.
The tech bearish market downturn has even brought back memories of the tech bubble of the 90s although most people can agree that it is not that bad, at least not yet. Whether however, this downturn is a bubble is a subject that needs further scrutinization.
Today’s tech companies raise money with the promise of large profits to be made further in the future, even if they be making losses at the moment. It is the story of Amazon, Netflix and a lot of others.
Some however have been quick to criticise this tactic to be too bullish and too risky. Theranos is a good example of when investors get too hung up on the hype train that follows ecstatic founders.
That said, the signs do not necessarily point to a serious “correction of the market” as many have been quick to point out. Rather the current slump in tech can be attributed, albeit not solely, to policy changes by central banks which can be further attributed to the changing global economic climate as the world recovers from the pandemic.