Why Tech Stocks Are Crashing and Burning
The market seeks profits, not promises, as a hope-fueled bull market sputters.
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The market is absolutely murdering tech stocks this year. Alphabet, Amazon, Apple, Meta, and Microsoft are down 19%, 31%, 13%, 38%, and 17% respectively. All are underperforming the S&P 500, and they’re among the fortunate. Netflix has dropped 65% in 2022, Shopify is down 70%, and Lyft lost nearly a third of its value just on Wednesday.
Tech is underperforming the market as a series of daunting challenges hit at once, including the flipping of some factors that once disproportionately favored the sector. The fed’s rate hikes are deprioritizing future growth, Russia’s war in Ukraine is hurting demand, inflation is tightening wallets, lockdowns in China are slowing the recovery, the supply chain remains broken, and some competitive moves — like Apple’s anti-tracking changes in iOS — are turning creative destruction into outright destruction.
“This sell-off magnitude [is] irrational,’ said tech analyst Dan Ives this week. But much of the buy-up was as well. And so, the flight from tech stocks isn’t likely to ebb anytime soon, creating the potential for further upheaval, takeovers, and bankruptcies.
The Fed’s zero interest rate policy drove much of the tech sector’s growth, and its rollback is causing much of the disruption. When interest rates were effectively zero, investors sought risky bets with far away returns since cash would essentially return nothing. This led to irrational wagers on concept companies like Rivian. But it also bolstered the share prices of platform companies — especially the tech giants — that could return significant money down the road. Tech valuations subsequently boomed and Big Tech alone made up nearly 25% of the S&P 500 in 2021.
Then, as the Fed signaled it would raise interest rates, the promise of returns on cash reemerged. Opportunity cost suddenly mattered, and so did profits. When the Fed did raise rates on Wednesday — and signaled more were on the way — investors fled tech stocks. The tech-heavy NASDAQ dropped 5% Thursday while…