Why Are Tech Stocks Down and Is Now the Time to Buy?
The question every investor seems to be asking right now is, why are tech stocks down? Well, for one, the economy is expecting some relatively major changes next year.
The Fed released its FOMC (Federal Open Market Committee) minutes from the committee meeting held in December yesterday. The Fed discusses shifting from the accommodative policy implemented to stimulate economic growth after the pandemic to a tighter policy stance during the session.
With inflation raging through the economy and a strong economic outlook, the Fed is looking to start unloading its swelling balance sheet finally.
Having said that, the committee is hinting at three rate hikes this year while slowing the purchasing of assets. High growth tech stocks are susceptible to changes in rates as higher interest rates mean lower future earnings potential.
On top of this, tech stocks were reaching overbought territory as the investors crowded into companies that could perform in any economy. Therefore, tech-heavy indexes like the Nasdaq 100 soared to new highs.
However, the actions that promoted economic growth are now starting to reverse. So why are tech stocks down as a result? Keep reading to find out more.
Why Are Tech Stocks Down? Digging Deeper
When it comes to big stock market movements, it can often result from an underlying factor. The news outlets blame it on headline-worthy events like the Fed meeting. But if you look closer at the price action, it tells you everything you need to know.
After the Fed minutes hit the headlines, the 10 Year Treasury Note spiked and is now approaching its highest rate since before the pandemic.
With this in mind, a higher rate lowers the value of future earnings. In particular, for high growth stocks like tech, investors pay a premium to gain higher profits down the road.
If a company’s future profits are less valuable, investors will look elsewhere for better opportunities. In this case, investors seem to be moving to less risky assets such as consumer staples and cyclical stocks.
Rotations are a natural part of the stock market that aligns with changes in the macroeconomic environment. And with the economy returning to pre-pandemic conditions, investors are aligning their portfolios accordingly.
As the Fed shifts its focus from stimulating growth to combating inflation, we will see continued volatility this year. Furthermore, as we gain a clearer picture of when the Fed is raising rates, tech stocks will likely remain in limbo.
At the same time, technology is playing an increasingly important role in our everyday lives.
Thus, the pullback could present an opportunity to buy leaders like Apple (Nasdaq: AAPL) and Nvidia (Nasdaq: NVDA) with established profits.
Which Tech Stocks Are Down the Most MTD?
Software stocks are getting hit the hardest, with leaders from last year like Cloudflare (NYSE: NET) falling over 50% from its highs. Not only that but particularly non-profitable companies that saw their values multiply since the pandemic.
Nonetheless, software became a critical factor for the economy to operate smoothly during the pandemic. Now that certain indications suggest the economy is getting back on track, investors look for better places to park their money.
Given these points, here are some of the most popular tech stocks down MTD.
- Cloudflare (NYSE: NET) -28%
- Robinhood (Nasdaq: HOOD) -26%
- Affirm Holdings (Nasdaq: AFRM) -20%
- Didi Global (Nasdaq: DIDI) -26%
- GitLab (Nasdaq: GTLB) -20%
- Peloton (Nasdaq: PTON) -19%
- Datadog (Nasdaq: DDOG) -19%
- Block (NYSE: SQ) -17%
- Adobe (Nasdaq: ADBE) -15%
- Salesforce (NYSE: CRM) -11%
- Palantir Technologies (NYSE: PLTR) -7%
As you can see, there’s a clear trend here. Many of these stocks are seeing their valuations correct after explosive runs from March 2020.
Popular semi stocks like AMD (Nasdaq: AMD) and Nvidia that were not too long ago the prized possession in the market are down over 15% from their highs.
Tech Stocks Relative Leaders
Even though all tech stocks are down from their highs, some are holding support better than their peers. Not surprisingly, most of the companies are well-established, profitable businesses. Even more, these companies are equipped to handle the changing conditions.
Having said that, here are the relative tech leaders down from their ATHs.
- Hewlett Packard (NYSE: HPE) -1.8%
- HP Inc. (NYSE: HPQ) -2%
- Dell (NYSE: DELL) -2.15%
- QUALCOMM (Nasdaq: QCOMM) -4.2%
- Cisco Systems (Nasdaq: CSCO) -5.3%
- Apple (Nasdaq: AAPL) -5.4%
- Taiwan Semi Manufacturing Co (NYSE: TSM) -10%
- Microsoft (Nasdaq: MSFT) -10%
- Meta Platforms (NYSE: FB) -13%
Again, you can see a clear trend here with relative leaders. The companies with buyers right now are well-positioned to continue growing no matter the environment.
Except for Meta (formerly Facebook), these are all pre-2000 companies. With this in mind, they have proven they can navigate different economies and still reward shareholders in the end.
Everything You Need to Know
Throughout the past decade, tech stocks are the clear winners. Additionally, since the pandemic, they are even more critical to society. So why are tech stocks down if they are more important than ever?
For one, the Fed introduced a low-interest environment to stimulate economic growth. As a result, shares of tech companies ballooned as future earnings potential skyrocketing. Consequently, the economy is getting overheated, with inflation hitting a 39-year high in December.
Therefore, the Fed is now pulling back some of its support, with the first-rate hike likely coming in March.
At the same time, technology isn’t going anywhere. With shareholders demanding companies continue increasing earnings, tech plays a vital role in the process.
For example, any business can benefit from automation from small companies to large corporations. Rather than paying human capital, technology can help speed up processes while saving costs.
Overall, the dip can present a buying opportunity with past leaders holding their own. Continue watching relative strength to find leaders with long-term potential.
And the next time you are wondering why are tech stocks down, take a look at the yield rates, they often paint the picture.