Why tech stocks are doing particularly badly during the market sell-off

JTech stocks like Amazon and Netflix have had a blistering run during the pandemic, boosted by stimulus funds and higher demand driven by lockdowns. But so far, 2022 hasn’t been good for the tech sector.

The tech-heavy Nasdaq Composite is down about 23% for the year so far, after climbing 21% in 2021. For comparison, the S&P 500 – an index made up of 500 of the largest American companies from a wide variety of industries — has fallen 13% this year.

Even after stocks broadly rebounded last week, tech giants like Netflix and Meta are down around 67% and 42% for the year, respectively, while popular “at-home” tech companies like Zoom and Peloton are down around 40% and 59%. Even shares of Apple and Google’s parent company Alphabet have fallen more than 20% so far in 2022.

Technology “got it on the chin,” says Liz Young, head of investment strategy at digital personal finance firm SoFi. “And that may continue to take it on the chin because we don’t seem to be getting out of this environment any time soon.”

Here’s why tech stocks have been battered amid the stock market’s selloff in recent weeks.

Fed interest rate hike

During the pandemic, the US central bank has kept interest rates near zero and stimulated financial markets through quantitative easing – a policy that involves the Federal Reserve buying financial assets to stimulate economic activity.

We saw the stock market hit record high after record high, and investors cheered as they made money with relative ease by investing in riskier assets like tech stocks, and even meme stocks and crypto. -change.

Now, that era of easy money is over. The Fed has already raised its benchmark interest rate twice in an effort to curb inflation, and it has outlined a plan to reduce its huge balance sheet. Equities suffered.

“Tech stocks have higher risks,” says Jay Hatfield, CEO of Infrastructure Capital Management. “So when the stock market goes down, they’re going to go down more.”

“The math has changed” for tech stocks

When experts determine the value of a stock, they don’t just look at how much each stock costs. An important factor they consider is the price-to-earnings ratio – essentially, the price at which a stock is trading relative to the amount of money the company actually earns.

Tech stocks are higher growth stocks and generally have a higher price-to-earnings ratio, says Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors.

For many technology stocks, it is expected that buying them will potentially pay off in the future due to this higher growth potential. Yet interest rates have risen, which tends to limit the ability of businesses and consumers to borrow and spend.

Now, when experts look at valuations and discount future cash flows to a present value, the higher discount rate will drive valuations down, Bartolini says.

“The math has changed in terms of valuing a business,” he adds.

Decline in demand

With many Americans stuck at home in recent years, there was huge demand for many of the products and services from these tech companies. As Eric Diton, president and CEO of The Wealth Alliance, recently told Money, you couldn’t have a better company than Amazon when people around the world wanted to stay home for their health and avoid suffering. to venture into the shops.

The surge in demand for technology products such as laptop computers and the rise of online shopping have helped drive up the stock prices of companies providing these goods and services.

“It’s a liquidity and pandemic bubble,” says Hatfield.

But the world is very different today than it was in 2020. People are traveling, dining out, and working in the office again. Peloton, the home workout company that has had a ton of success during the pandemic, for example, lost $757 million in the first three months of 2022 and earlier this year unveiled plans to lay off 2,800 employees. (Peloton did not respond to Money’s request for comment.)

Changing investor demographics

Tons of new investors have entered the stock market during the pandemic. Among them are high school and college students pairing up to swap trading tips between classes, as well as people stuck at home taking to social media to learn more about investing with their stimulus checks. Many of these new investors were quite young, says Young.

“This generation is naturally more interested in tech stocks,” she adds. “They’re more technologically advanced than previous generations at that age, so that’s what they’re comfortable with and that’s what they know.”

But now that the economic environment is putting pressure on these stocks, it’s hard for investors — especially newer ones — to see beyond and understand the value of holding tech stocks going forward, says Young. New investors may not have had money in the market long enough to see a significant downturn.

COVID-19 Lockdowns

Tech stocks are also heavily exposed to the effects of COVID-19 lockdowns in China. The country has maintained “zero COVID” policies throughout the pandemic to limit the spread of the virus through strict lockdowns, testing and restrictions. But the impact of these policies on the Chinese economy raises concerns.

While some companies outside of the tech industry are suffering from these lockdowns because Southeast Asia is a big factor in their sourcing and supply chain, tech companies are particularly hard hit as many people buying their products are also found in this part of the world. , says Shawn Cruz, chief business strategist, TD Ameritrade.

“Some of these tech companies are getting crushed on both sides of the coin,” Cruz says.

Is this a buying opportunity for technology stocks?

When stock prices are struggling, it’s possible to strike a deal on stocks you may have had your eye on in the past.

But it’s essential to focus on profitability, says Bartolini. In the technology sector, some companies have seen their valuations fall but are still generally profitable, such as Apple and Microsoft. However, when you get into some of the smaller and midsize stocks, there are plenty of companies that aren’t profitable, like virtual health services company Teladoc and e-commerce platform Robinhood.

If you buy a weak stock simply because it is weak, things can get risky. The risk is that you buy the stock before it bottoms out and there’s more pain to come, says Bartolini.

If you buy a stock and then it drops 10%, you’ll need an 11% gain on the way back just to break even. Of course, there’s no guarantee that any individual stock will return to its 2021 high. Some dot-com era favorites, like Pets.com, didn’t survive the bubble burst.

Once you’ve focused on what you want to buy, don’t spend all your money in one day, says Young.

Instead, use a method like dollar cost averaging, which involves investing a modest amount of money at regular intervals instead of trying to buy the dip all at once. For example, if you have $10,000 to invest, you can invest $1,000 every other Monday.

This way you maintain a disciplined approach and minimize risk, while ensuring you benefit from a recovery.

“Technology is still the future of the American economy,” says Young. “It’s something that may take a little while to show its luster again, but it’s not an eternal situation.”

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