Tech stocks have been the darlings of every amateur investor’s portfolio for some time, with the share prices of big tech companies seeming to increase endlessly in value. Yes, the risks are always high but many of the world’s most valuable companies are tech companies. And who could fail to be seduced by the idea of investing in the next Amazon or Apple?
Moreover, tech stocks are often a bellwether for the economy and the stock market in general.
The pandemic sent tech stocks soaring. FANG stocks — named from Facebook, Amazon, Netflix and Google, but also including Microsoft and Apple – helped elevate the S&P 500 by 400% from 2009 lows and the Nasdaq 100 index shifted up more than 700% during the same period, leaving other markets far behind.
All that changed, however, when the bull market ended. The first half of 2022 saw Wall Street’s worst start in 50 years, thanks to geopolitical tensions, soaring energy prices and rising interest rates. The past six months have seen tech stocks tumble – Tesla dropped by 30%, Microsoft stocks dropped 16% from $334.75 in January to $280.74 at market close on 29 July 2022, Apple down 13% and Amazon at one point down a whopping 39%.
Then, between July and the first few days of August things started gaining some momentum again, with the US Tech 100 rallying after Fed Chair Jerome Powell’s remarks that interest rates are at “neutral.”
Has US tech stock been overvalued?
Tech stocks are usually considered high-risk investments. The flood of cheap money during the pandemic period saw investors borrow at all-time lows and plough their funds into tech and crypto* for high returns. In recent months, as central banks have been withdrawing that cheap money, by way of reducing quantitative easing or hiking interest rates, we have seen investors take their profit from those gains – and with this an inevitable drop in prices.
Central banks sending the wrong messages to financial markets and being slow to react has also probably also exacerbated some of the moves as they change course from being on hold to then moving to a hiking bias. With inflation spiraling and larger hikes required, the market has been jittery and volatile, and we may have to wait for the Federal Reserve to announce they’re on hold before confidence returns.
There’s a strong argument that with those large flows of funds into tech stocks during 2020/2021, the sector was overvalued. For ‘lockdown’ stocks such as Peloton Interactive, Inc or Zoom Video Communications this is almost certainly the case: they are now trading at a fraction of their all-time highs. Tesla Inc., the poster boy stock of the pandemic saw its valuation fall by half between November and May 2022 before regaining some ground recently.
Overall, the Nasdaq is now down 30% so far on the year after seeing a bit of a bounce. This led many to warn of a tech-driven crash like the dot.com bubble crash in the late nineties.
What’s next for US tech stocks?
There is no doubt that some stocks remain a reasonable investment and investors should be looking at the dip to gain exposure to certain companies in which they are interested. However, some analysts are suggesting that the fall is not over and that company earnings will start to come into focus if the US were to experience a protracted recession. Others have pointed out that those tech companies that have grown a strong cash balance during the pandemic (such as Alphabet and Microsoft) will be able to expand and make strategic acquisitions during the coming months.
Recently President Biden signed the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS) providing $52bn in subsidies over the next five years to boost US chip production, address supply chain issues and decrease the country’s reliance on places like Taiwan and China. Much of the tech industry depends on the supply of semiconductors. However, given the higher cost of US production, it’s unclear how globally competitive it may be and whether this could lead to further inflationary pressures. The act’s success depends on how quickly it can be implemented, given that shortages are currently so extreme.
With belt buckles tightening everywhere, tech investors are best advised to stick to what they can afford, with the knowledge that it might take a while for some tech stocks to see solid growth.
For more on tech stocks, their effect on the dollar, and more sector-specific information, go to capital.com 81.40% of retail CFD accounts lose money.
*Crypto Derivatives are not available to Retail clients registered with Capital Com (UK) Ltd.
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