Once again, tech stocks are under pressure for well-known reasons.
Investors can lay the blame on expectations of tighter monetary policy from the Federal Reserve, concerns over rising inflation, a significant increase in bond yields, covid 19, interest rate hikes, a global economic slowdown, and the ongoing conflict in Ukraine.
When the epidemic first started more than two years ago, technology businesses prospered. However, when a large portion of the population returns to work and spends less time at home, the tech sector is currently experiencing severe losses as investors worry that pandemic-boosted enterprises are losing momentum.
All eyes are on how investors will react when a slew of technology companies publish their financial results this week. A recent string of underwhelming results from the biggest names in tech—including Alphabet, Microsoft, Meta, and Amazon—has alarmed investors about the outlook for the sector.
Wall Street analysts warn that the continued decline in tech stocks this week could be bad news for the overall economy as it is likely an indication that inflation and high-interest rates are putting more pressure on individuals and businesses than anticipated. For tech stocks, which were some of the biggest beneficiaries during the early stages of the pandemic, the most recent collapse adds to an already miserable year. Here are the reasons for the tech stocks downturn:
Rising interest rates – and the resulting higher bond yields
Tech stocks suffer from rising interest rates and higher bond yields for a number of reasons. The main point is that a lot of tech businesses are currently either not profitable or only marginally profitable. If bond yields are higher, investors are missing out on current returns by holding tech companies that won’t start making money until a long time from now. That makes those companies appear much less desirable.
Higher interest rates are advantageous to the financial industry as well. Over the past few months, banks have performed particularly well, luring investors away from technology. Investors are becoming concerned about how soon and how quickly the Fed will raise interest rates in light of the United States unprecedented level of inflation—the consumer price index rose at the fastest annual rate in December since 1982. Markets had anticipated three rate increases in 2022—the first of which occurred in March—but there is growing speculation that additional or larger increases may be forthcoming.
Inflation is also persisting.
Inflation is also soaring and is anticipated to continue doing so in 2023. In addition to increasing the likelihood that the Fed will raise rates, this prompts buyers to look for businesses that can weather the storm.
Investors are looking for companies that can successfully increase their prices rather than flashy tech names, such as luxury consumer brands. And they’re investing in industries like real estate and energy that typically perform well when inflation is high. However, not all tech firms are created equal. Analysts predict that stocks like Apple, Amazon, and Google will perform significantly better than unprofitable tech companies because, well, they are extremely profitable.
Tech shares fell as a result of COVID-19.
Many companies have struggled to keep production at the expected level due to COVID-19 and the relative restrictions enacted in China to curb its spread. Apple and Tesla are reportedly experiencing one of their most frustrating periods of business operations, with their shares falling due to supply-related issues.
Supply disruptions wreaking havoc on these well-known tech behemoths stem from their Chinese production lines, with the two companies recording the lowest share points since June 2021 and a 73 percent record stock drop in November 2022.
Apple’s stock has dropped to its lowest level since June 2021. Tesla’s stock has fallen 73% since its all-time high in November 2021. Companies in China have struggled to maintain production due to Covid restrictions and weeks of lockdowns. They are now facing a staffing shortage as China battles a Covid wave following the lifting of years of restrictions.
China announced on January 8 that it will relax its strict quarantine rules for travelers, a positive sign for many investors who anticipate an ease in supply chain movement in 2023. As a result, as the Asian country battles a COVID-19 wave after lifting years of restrictions, various enterprises in China are now facing a staffing crunch.
China’s National Health Commission announced on Monday that the country will no longer require inbound travelers to undergo quarantine beginning January 8th. Many investors see the move as a positive sign because it will ease supply chain movement in 2023.
China’s management of COVID-19 will also be downgraded to the less stringent Category B from the current top-level Category A, according to a statement from the health authority. This is due to the disease becoming less virulent and gradually transforming into a common respiratory infection.
Given the increase in Covid cases in key manufacturing hubs, analysts believe it will take time for production to resume.
“Factories will face labor shortages for at least 4-6 weeks as the wave passes through their production areas, and most migrant workers will return to their home villages for the Lunar New Year at the end of January,” says Simon Baptist, chief economist at The Economist Intelligence Unit.
During times of conflict, tech sector stocks typically experience a complete collapse. And in order to comprehend why, it is important to consider the key reason why investors initially choose to purchase tech stocks.
Because they can borrow money at low rates, tech companies can develop and expand quickly. And it is this growth that draws many investors to tech equities.
In contrast, rising borrowing costs during armed conflict force IT companies to reduce their borrowing, which slows down their expansion.
But keep in mind that tech stocks are only attractive to investors because of their expansion. So when growth slows, they sell everything right away, sending tech stocks down.
Worries about the state of the economy
It’s challenging to forecast the state of the economy many months from now, as some economists worry that the increase in interest rates may cause the economy to enter a period of recession marked by a drop in consumer expenditure, particularly on specialized technology products. Despite more than a year of fast expansion, the nation’s economy unexpectedly contracted at a 1.4% annualized rate in the first three months of 2022, according to a report from the Bureau of Economic Analysis.
For instance, Deutsche Bank predicted a significant recession in the United States for the following year in a note to customers, asserting that it is “very possible that the Fed will have to step on the brakes even more severely, and a severe recession will be required to control inflation.
Similar ominous predictions are made by Euro Pacific Capital’s CEO and leading global strategist, Peter Schiff: He stated on Twitter that this time, “the entire US economy is about to shut down again, but this time it won’t be a dress rehearsal like with [COVID-19]”. While Bowersock Hill acknowledges that a recession is conceivable, it won’t be as catastrophic as some have predicted. She asserts that “the fundamentals of the economy are still extremely robust.” The number of jobs and incomes are excellent, and consumers have a lot of cash on hand.