Technology stocks are down. Here’s what that means for the economy

TTech companies thrived when the pandemic began more than two years ago. But now, as much of the population returns to work and spends less time at home, the tech sector is suffering huge losses as investors fear that companies bolstered by the pandemic are losing momentum.

The Nasdaq-heavy composite index posted the biggest drop, closing more than 4% on Monday after ending April with its worst monthly performance since the 2008 financial crisis. It rose 0.98% on Tuesday, but the broad tech sell-off nonetheless wiped out trillions of dollars of market value. , with investors dumping shares of everything from semiconductor companies to gadget makers and social media giants.

By midday on Tuesday, Amazon shares were trading more than 40% below the company’s 52-week high of $3,773.08, a level not seen since February 2020. Apple shares, despite its record earnings last quarter, were down 15 percent. % since early January. . The recent slowdown in revenue growth at Meta, Facebook’s parent company, has put hiring freezes on hold, amid a 47% drop in its share price since September.

US Treasury Secretary Janet Yellen told lawmakers on Tuesday that she and other top financial regulators would not be surprised to see market turmoil extend through the summer, as the pandemic and war in Ukraine may continue to add turmoil to the global economy.

“There is the potential for continued volatility and unevenness in global growth as countries continue to fight the pandemic,” Yellen said during a hearing on the Financial Stability Oversight Board’s annual report. “The unprovoked Russian invasion of Ukraine has increased economic uncertainty.”

Here are the top three factors that lead to a tech stock sale.

lack of income

Big tech companies have dumped more than $1 trillion in value over the past three trading sessions as many of the world’s largest companies are still reeling from the effects of not meeting earnings expectations.

Peloton, one of the most popular companies in the early days of the pandemic, announced Tuesday morning that it lost $757 million in the first three months of the year, much more than analysts had expected. Peloton shares were down 13% by midday Tuesday, leaving the fitness-related brand with a market value of about $4 billion, down more than 90% from its early 2021 highs of $47 billion.

Another beloved pandemic, Netflix, has seen its shares drop about 75% from their November high after losing 200,000 subscribers in the first quarter, with expectations of losing more than 2 million subscribers in the second quarter due to increased competition. The market value of Zoom, a popular virtual conferencing company that people rely on to keep in touch while working from home or going to school, has fallen to $26 billion, slightly less than its value before the pandemic.

These earnings drops are perhaps the biggest signs that the pandemic bubble has burst, as more consumers shift their spending habits from online digital experiences to real-world experiences, says Emily Bowersock-Hill, CEO of Bowersock Capital Partners, a financial management company. But constant supply chain backlogs and rising prices have left consumers with a strain on their pocketbooks, and there is no clear answer as to when that will change.

In addition, retail investors, trading individually in the stock market, began to lose interest. During the pandemic, about 25% of stocks were traded by these unprofessional investors, backed by online trading platforms like Robinhood where people were working from home. Now, about half of those investors have left the stock market as more tech companies fail to meet earnings expectations and the market returns to reality. “It’s a factor that people don’t talk about enough about,” Bowersock Hill says. “A lot of buyers decided to stay out of the market for a while.”

As investors weigh these risks, Wall Street is casting doubt on Big Tech’s ability to maintain the momentum needed to justify high valuations spurred by the pandemic’s unprecedented demand for new technology. But some analysts believe the sell-off is irrational and gone too far, given the necessity of many technical products. Dan Ives, managing director at Wedbush Securities, thinks some tech stocks like Apple and Microsoft have an upward movement of 25-30% for the rest of the year, while other e-commerce companies and work-from-home beneficiaries are likely to continue to do so. Collide.

“It’s easy to get shot in a crowded theater when panic is in the air,” he wrote on Twitter. “If you think that cloud adoption, cybersecurity, corporate spending, electric vehicle adoption, and iPhone purchases are going to go too far and fall off a cliff, move on to your negative tech thesis!”

high interest rates

With inflation at a 40-year high, the Federal Reserve has started raising interest rates and will soon cut its $9 trillion balance sheet in an effort to control prices. Such moves could make Wall Street nervous, as investors fear they will make borrowing more expensive for businesses and households, stifling economic growth and possibly leading to a recession.

But Fed officials are trying to avoid that. Several policymakers said their approach is to raise interest rates above 2% by the end of 2022 in a way that does not disturb the markets. “You could argue that the Fed should have started doing that earlier, but it didn’t have a choice to maintain credibility and control inflation,” Powersock-Hill says.

However, analysts say the rapid rise in interest rates has forced investors to rethink whether stocks that thrived in a low interest rate environment will be able to continue to thrive in a higher interest rate environment. Uncertainty and the rush of question marks is one reason investors are taking less risk on tech companies, which tend to be worse when interest rates are higher and borrowing is more expensive.

“Forward-looking investors who are holding on to technology companies with growth potential aren’t getting a lot of cash flow,” Powersock-Hill says. “This is what happens when interest rates go up: the value of the company’s growth goes down.”

Concerns about the direction of the economy

It’s hard to predict what the economy will look like months from now, as some analysts fear higher interest rates could send the economy into a recession highlighted by a drop in spending – especially for niche technology products. That concern was heightened by a report by the Bureau of Economic Analysis that said the country’s economy unexpectedly contracted at an annual rate of 1.4% in the first three months of 2022, despite more than a year of rapid growth.

Deutsche Bank, for example, said last month that it expects a major recession in the US next year, claiming in a report to clients that “it is very likely that the Fed will have to hit the brakes more firmly, and a deep recession” will be needed to overcome inflation.”

Peter Schiff, CEO and chief global strategist at Euro Pacific Capital, has a similar ominous forecast: “The entire US economy is on the cusp of shutting down again, but this time it won’t be a rehearsal like [COVID-19]wrote on Twitter. Bowersock Hill agrees that a recession is possible, but not as severely as others suggest. “The fundamentals of the economy are still very strong,” she says. “We have excellent job numbers, good earnings, and consumers have a lot of money on their balance sheets.”

But when people see reports of a possible recession, it can “dominate industrial consciousness” and have a “chilling effect” on the economy, Powersock-Hill adds.

As economists try to predict the broader direction of the economy, many seem to view the tech stock’s recent decline as an early indicator of what could happen in a recession.

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write to Nick Buble at [email protected]

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