Here's why tech stocks are cratering as the Fed prepares to hike interest rates
Tech stockstook a beating Wednesday, and the tech-heavy Nasdaq 100has struggled to regain ground since then.
- Rising interest rates and expectations of strong economic growth and inflation are all key factors in the sell-off.
The index slipped slightly Thursday, and futures are pointing lower Friday. Ark Invest's Innovation ETF – seen by analysts as a proxy for unprofitable tech companies – has slumped 12% this year so far.
But why are tech stocks falling so hard? Is it rising bond yields, expectations for strong growth, hot inflation, or all of the above? We'll try to explain.
Central banks juiced the market in 2020 and 2021
First, it's important to understand why tech rocketed to begin with. When coronavirus hit in 2020, central banks slashed interest rates and pumped trillions of dollars into economies.
Bond yields cratered, so investors started looking elsewhere for returns. Banks, energy companies and the like were in the doldrums, so investors turned to the so-called stay-at-home stocks like Amazon, Apple and Google.
Fast forward a year and almost all of those calculations have changed.
Bond yields are rising – and that's bad news for tech
But the trigger for Wednesday's sell-off was the release of minutes from the last Fed meeting in December. They revealed officials are weighing up moving faster than previously expected, sending investors into a panic.
Read more: These 6 stocks are the favorites in the 'stock pickers' market' of 2022, says the investing chief of a firm that handles nearly $30 billion in assets — though an overlooked risk could rattle markets
Rising interest rates – and the resulting higher bond yields – hurt tech stocks for a few reasons.
The key one is that many technology companies are currently unprofitable or make little money. If bond yields are higher, then investors are losing out on returns in the here and now by holding tech companies that will only start earning properly in the distant future. That makes those firms look a lot less appealing.
Higher interest rates are also good for the financial sector. Banks have fared particularly well over the last few months, drawing investors away from tech.
Growth is expected to stay strong
Another key factor at play is that investors expect the US and global economy to be strong in 2022.
US jobs data from private company ADP came in much stronger than expected Wednesday. On top of this, the Omicron coronavirus variant tearing across the US seems to be considerably milder than previous iterations.
The prospect of a strong economy is sending investors back to the very kinds of companies – airlines, restaurants, hotels – that they dumped during the worst of the pandemic in favor of stay-at-home and speculative tech stocks.
Inflation is also sticking around
Yet inflation is also red hot, and is expected to remain strong in 2022. Not only does that make it more likely that the Fed will raise rates, but it also sends buyers searching for companies that can ride out the storm.
Instead of flashy tech names, investors are snooping around for firms that can successfully raise their prices, such as luxury consumer brands. And they're buying sectors that traditionally fare well during times of inflation, like real estate and energy.
But not all tech companies are equal. Analysts expect stocks such as Apple, Amazon and Google to fare much better in 2022 than unprofitable tech companies, because, simply put, they make tons of money.
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