The tech sector faced another day of selling pressure on Tuesday, as investors weighed the impact of higher interest rates and slowing economic growth on the industry. The Nasdaq Composite, which is heavily weighted with technology stocks, dropped 1.57% to close at 13,063.61, its lowest level since May. The S&P 500 tech sector also fell 1.47%, underperforming the broader market.
What’s driving the tech sell-off?
One of the main factors behind the tech sell-off is the rise in bond yields, which reflect the market’s expectations for inflation and economic growth. Higher yields make borrowing more expensive for companies and consumers, and also reduce the relative attractiveness of growth stocks, which tend to have higher valuations and lower dividends.
The yield on the 10-year Treasury note, a benchmark for interest rates, climbed to 2.83% on Tuesday, its highest level since June 2020. The yield has risen more than 50 basis points since the start of September, as investors anticipate that the Federal Reserve will start tapering its bond-buying program and raise interest rates sooner than expected.
The Fed’s latest projections, released last week, showed that most policymakers expect to hike rates at least once by the end of 2023, and three times in 2024. This is a more hawkish stance than the previous forecast in June, which showed no rate hikes until 2024.
Another factor that is weighing on the tech sector is the uncertainty over the economic outlook, especially amid the ongoing coronavirus pandemic and supply chain disruptions. The latest data showed that U.S. consumer confidence fell to a seven-month low in September, while new home sales also declined unexpectedly.
Some analysts have warned that the tech sector may face a slowdown in earnings growth and revenue momentum in the coming quarters, as the pandemic-induced boost fades and competition intensifies. For instance, Apple, one of the largest tech companies in the world, recently warned that its sales growth will slow down due to chip shortages and weaker demand in China.
Which tech stocks are hit hardest?
The tech sell-off has affected a wide range of companies, from software giants to e-commerce platforms to semiconductor makers. Some of the biggest losers on Tuesday included:
- Amazon, which fell 4% after the Federal Trade Commission accused it of illegally maintaining “monopoly power” over third-party sellers on its marketplace. The FTC also said it will review Amazon’s proposed acquisition of MGM Studios for potential antitrust violations.
- Netflix, which dropped 3.6% after a report from Bloomberg said that Disney is considering launching a new streaming service that would offer content from its ABC network, ESPN and other channels. Disney already competes with Netflix through its Disney+ platform, which has more than 100 million subscribers worldwide.
- Nvidia, which slid 3.4% after a report from The Wall Street Journal said that U.S. regulators are likely to block its proposed $40 billion takeover of British chip designer Arm Holdings. The deal, which was announced last year, has faced opposition from rivals and regulators in several countries over antitrust and national security concerns.
- Tesla, which declined 2.8% after CEO Elon Musk said that he expects global vehicle deliveries to be delayed by a week due to “extreme supply chain limitations”. Musk also said that Tesla will hold an event on October 28 to unveil its Cybertruck electric pickup truck.
Is there any hope for tech investors?
Despite the recent slump, some analysts remain optimistic about the long-term prospects of the tech sector, arguing that it still offers innovation, growth and resilience in a changing world.
For instance, JPMorgan Chase CEO Jamie Dimon said in an interview with CNBC-TV18 that he is bullish on technology stocks, especially those that are focused on artificial intelligence, cloud computing and cybersecurity. He said that these areas are “critical” for businesses and consumers alike, and that they will continue to grow regardless of interest rates or geopolitics.
Similarly, Morgan Stanley analyst Katy Huberty said in a note that she expects tech stocks to outperform the market in the next six to 12 months, as they benefit from strong demand for digital services and products amid the pandemic recovery. She said that tech stocks are trading at a discount to their historical averages and offer attractive risk-reward profiles.
However, Huberty also cautioned that tech investors should be selective and focus on quality companies with sustainable competitive advantages and earnings growth potential. She said that some of the best opportunities are in software-as-a-service (SaaS), cloud infrastructure and e-commerce segments.
