Technology stocks

Tech stocks stumble to worst start since 2016

Shares of U.S. tech companies are off to the worst start to the year since 2016, as fears of runaway inflation jeopardize the sky-high valuations left behind by the market’s rise in recent years.

After several failed attempts this week to rebound strongly, investors remain reluctant to reinvest heavily in growth stocks and there are still no major signs that the pressure on tech companies will ease any time soon.

The Nasdaq 100 index, which includes some of the nation’s tech behemoths, is down more than 4% this year, even after a Friday night rebound that erased its losses from earlier in the week. The broader Nasdaq composite index fell for a third consecutive week.

High-flying growth stocks are particularly hurt by the growing belief that the Federal Reserve will soon begin to withdraw the massive monetary stimulus package that has kept the financial system awash with liquidity since the pandemic.

Concerns over rising rates were fueled by data this week showing that US consumer prices rose the most last year since June 1982, while US retail sales rose fell in December the most in 10 months, indicating that higher prices could deter consumers. This threatens to put additional pressure on tech stocks whose valuations are based on future earnings growth, as higher interest rates reduce the present value of those expected earnings.

“The Nasdaq stumbled in 2022,” said Douglas Porter, chief economist at BMO Capital Markets, in a note to clients. While he said these high-flying companies have huge long-term potential, these distant earnings prospects face “the cold calculation of being discounted by current yields, so the Fed’s sudden U-turn is a clear headwind for lofty valuations.”

The market generally expects the Fed to start raising interest rates in March and reduce its bond inventory in the second half of the year, removing a source of support for the Treasuries market. Fed Chairman Jerome Powell told the Senate Banking Committee this week that he was prepared to raise interest rates more than expected if needed to get inflation under control.

“Inflation got really high, reaching multi-decade highs, and that really became a problem for the market,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab & Co., in an interview. “We’re going to get a rate hike in March, but that’s still a way out, and the market could continue to struggle if inflation stays high in the meantime.”

Even with the recent volatility, the tech sector overall remains a long-term outperformer relative to the broader market. The Philadelphia Stock Exchange’s semiconductor index is up nearly 40% since the start of 2021, while the S&P 500 information technology index is up 27%. The overall S&P 500 index is up around 24% over the same period, with names like Apple Inc., Microsoft Corp. and Alphabet Inc. all outperforming the benchmark.

One exception is the software industry, which has come under some of the most pressure as investors turn away from high-value growth stocks. Since peaking in November, the iShares Expanded Tech-Software Sector ETF has been on a steep downtrend, with declines over the past three weeks bringing it back to where it left off. 2020.

Big Tech stocks like Apple and Microsoft, for example, have strong balance sheets, and large, established, dividend-paying companies may hold up well if investors turn to quality stocks, according to Frederick. But that’s not as likely for micro-cap stocks, which have generally been more volatile and less liquid than stocks of larger companies.

“We need to see some rate stabilization, and more certainty about what the economic data looks like overall, before you see people moving back to these higher-growth names,” Frederick added. “Valuations have come down a lot, but it may take a while for them to come back.”