What are the factors weighing on the Nasdaq this year? Why are Fed decisions hurting tech stocks? What could contribute to a continuation of the decline or a rebound of the Nasdaq in 2022? We will tell you more in this article.
What Are The Factors Weighing On Tech Stocks This Year?
Tech companies haven't seen such a crash since 2001 and the bursting of the dot-com bubble. The Nasdaq fell 3.8% last week, for the seventh consecutive week. It's the longest streak of declines for the tech-heavy Nasdaq index in 21 years. In total, the Nasdaq is down 27.8% since its levels at the start of 2022.
Inflation, rising interest rates, the war in Ukraine, and zero COVID-19 policy lockdowns in China are making the stock market complicated in general, and so are investors in tech and growth stocks who are paying a high price after the historic recoveries of recent years.
Indeed, many tech companies saw their sales swell at the start of the coronavirus pandemic, with confined consumers looking for products they could use from home. Some companies have condensed five years of growth into two years. But in today's inflationary environment, if consumers are cutting back on spending, it's natural to wonder whether streaming subscriptions, online shopping, and the latest smartphones and gadgets will still be priorities.
The Fed has signaled it will continue to raise rates to fight inflation, raising concerns that rising capital costs, combined with deteriorating consumer confidence, could squeeze corporate profits.
Why Are Fed Decisions Hurting Tech Stocks?
After an initially positive reaction to the Fed's interest rate hike in early May—the second of seven hikes scheduled for 2022—investors have been concerned about the central bank's approach to controlling inflation, which could make borrowing more expensive for businesses and households.
Fed officials are trying to raise interest rates at a pace that doesn't completely stifle economic growth, but it's a difficult balance to strike. If the economy cools too quickly, it could fall into a recession, which is usually defined as two consecutive quarters of decline.
Moreover, investors seem to lack confidence in the ability of the central bank to control inflation without triggering a recession. Chicago's VIX index, known as "Wall Street's fear gauge," is up nearly 100% year-to-date.
A rise in interest rates puts tech stocks on the front lines: interest rates are a key component of the discounted cash flow model—one of the most widely used valuation models for stocks, especially of the growth type. Finally, a rise in interest rates reduces the attractiveness of certain stocks on the market. Imagine a stock that trades at a price/earnings ratio of 50x, which means an earnings yield of 2%.
If this 2% is interesting in a context where the savings account offers between 0 and 1%, it is much less so if the risk-free alternative is at a 1 or 2% return. Investors would then leave high valuations in search of better options.
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What Could Contribute To A Continuation Of The Decline Or A Rebound?
It is difficult to find positive catalysts in the current market environment. The continued impact of China's zero COVID policy and concerns about the Fed's next steps are putting constant pressure on the markets.
However, even if the outlook is pessimistic, any positive developments on the geopolitical front, or the release of a weaker-than-expected Consumer Price Index report, could help turn the tide and see investors adapt to new risky assets such as technology stocks in the Nasdaq index.
For other investors like Jeremy Grantham and Scott Minerd, the speculative nature of many investments in the market over the past few years shows that little has changed since the dot-com bubble of 2000. They believe there is a very strong similarity between the dot-com crash and the bear market we are experiencing today.
What followed the bursting of the dot-com bubble was a short but painful recession. Is this where the markets are headed today?
Disclaimer
All of our information is, by nature, generic. They do not take into account your personal situation and do not in any way constitute personalized recommendations with a view to carrying out transactions and cannot be assimilated to a financial investment advice service, nor to any incentive to buy or sell instruments.
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