Author: Greg Hope
The tech sector is one of the most critical sectors in the economy. It accounts for about 19% of the S&P 500’s market capitalization and has been a crucial driver of economic growth since the late 1990s.
In recent years, tech stocks have outperformed other sectors, but they are now struggling to recover their losses.
Despite the recent gains, this year has been tough on tech stocks, with the Nasdaq Composite (IXIC) still down 18% and DocuSign (DOCU) sitting nearly 80% in the red over the same period.
The main reason for this is the blame for contributing to people’s addiction to screens; by producing addictive and anti-social technology.
While some analysts contend that the tech industry has been overstated, the truth is that the game may still be stacked against tech enterprises.
A Hard Landing
The central bank has been working to provide a “soft landing” for the American economy, where inflation is controlled but GDP growth persists. However, even Fed Chair Jerome Powell acknowledges that it may be “very tough.” As a result, retail and institutional tech investors have fled the market.
Higher discount rates are a result of the stricter monetary policy and strong inflation, according to Liz Young, head of the investment strategy at Sofi, who spoke on the most recent Yahoo Finance Plus webinar. As long as those rates remain high, we have a headwind for technology—or at the very least, a ceiling on those strong growth equities.
A Year Marked by Macroeconomic Challenges
Numerous macroeconomic headwinds, such as the Ukraine war, COVID-19 lockdowns in China, clogged supply chains, extremely high inflation, sluggish economic development, and the list goes on, have had a negative impact on tech companies.
Dan Ives (Wedbush’s tech analyst) says this isn’t good news for markets, but tech shares are struggling more than others. After all, most investors wouldn’t consider it an advice to put their money in frequently extremely speculative risky assets during a recession.
The high-growth companies that rely on cheap lending rates have unfairly benefited from fiscal and monetary immense wealth. As the Federal Reserve seeks to rein in runaway inflation by boosting interest rates, these equities have borne the brunt of the market drop. As risk-free rates increase, valuations become increasingly problematic for tech investors.
A Tech Sector Repricing as Rates Rise
Fears of a recession have been fueled by rising rates and sluggish growth, which has led bond traders to start speculating on potential rate cuts. According to specific indicators, the bond market is already pricing in Fed lowering as early as the first quarter of 2023.
The right combination of lower rates and looser monetary policy might be what tech investors require to get back in shape.
According to Young, if there is economic recession anxiety, the 10-year might still fall from here.
Unfortunately, going back to breakeven may take years, if not never, for bruised investors who are desperate to recover heavy losses.
Anybody can see how risky a return to historic highs can be by taking a short glance at some of the key figures from the previous two market explosions.
Final Remarks
The tech industry has favored investors, and there is still room for automation of even more productive operations. Nevertheless, the industry will face some economic and political challenges with machine technology for the foreseeable future.