Technology stocks head for historic wipeout as US economy cools
SCEPTICS have long made a sport of predicting that the decade-long rally in technology stocks was destined to reverse. At the halfway point of 2022, it seems like this is the year when they will be proven right.
The Nasdaq 100 Index has tumbled by almost a third this year, including a 0.9 per cent drop on Thursday (Jun 30), erasing some US$5.4 trillion in value in a sell-off that has left few stocks unscathed. The benchmark, which gets half its value from tech, is on track for its biggest calendar-year decline ever.
And it is hard to make a convincing case for a market recovery in the second half: Investors are pricing in further interest rate increases from the Federal Reserve as the central bank tries to combat inflation, sparking concern that the global economy will tip into recession. Analysts are beginning to cut earnings estimates for technology companies as a result.
“The issue is that we haven’t really seen inflation like this in decades,” said Michael Nell, a senior investment analyst and portfolio manager at UBS Asset Management. “Since 2009 or so, we’ve had very low rates that contributed to the years of strength we saw. However, those low rates weren’t going to last forever.”
Some of the biggest winners of the pandemic years morphed into the worst performers in 2022, among them streaming giant Netflix., telemedicine company Teledoc Health, and companies such as Zoom Video Communications and DocuSign that benefited from the rise of remote work.
At this rate, the Nasdaq 100 would finish the year down 49 per cent, the biggest annual collapse in the almost 4 decades that Bloomberg has tracked the benchmark. The last time the index fell in a calendar year was 2018, when it dipped 1 per cent, and its last notable decline was in 2008. It had bigger peak-to-trough plunges in the wake of the late 1990s Internet bubble — an 83 per cent wipeout — and in the 2007-2008 crisis, when it dropped by more than half.
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Selling this year has raged across industries, with long-time market leaders collapsing. Apple, Microsoft and Alphabet have all lost more than 20 per cent, Amazon.com is off 36 per cent, Nvidia is down almost 50 per cent, and Meta Platforms has lost more than half its value. Indexes of semiconductor and software stocks have both fallen by about a third.
This year’s successive selloffs have cut some of the biggest technology companies down to size. The Nasdaq 100 now has 21 members with market values of US$100 billion or more, down from 33 at the end of last year.
The oldest of old tech has been a pocket of strength in the market. International Business Machines (IBM) has returned 7 per cent this year including dividends. Of course, the strength comes after an extended stretch of massive underperformance. IBM has returned less than 20 per cent over the past 5 years versus a gain of more than 150 per cent for the S&P 500 tech index.
IBM’s year-to-date advance reflects investors’ shift into cheaper, dividend-paying stocks and out of highly valued growth stocks that have led the market for years. IBM trades at less than 14 times estimated earnings, a discount to the market, and yields 4.7 per cent annually in dividends, the highest among tech companies in the S&P 500. Nasdaq 100 companies that pay dividends lost 10 per cent in the past year, compared with a 25 per cent decline for those that do not.
“Quality and value is probably the best place to be in the short term,” said Michael Arone, chief investment strategist at State Street Global Advisors’ US SPDR business. “A lot of the names we’ve seen outperform this year have low variance in their earnings, good cash flow, they pay dividends, and they’re relatively stable businesses.”
Bulls hold out hope that this year’s market plunge will bottom out as investors embrace the technology industry’s long-term growth potential and cheaper valuations. The Nasdaq 100 is now trading at about 19.2 times estimated earnings, well below a 2020 peak above 31, and under its 10-year average of about 20.1.
Nell, of UBS Asset Management, is among those keeping the faith.
“We expect tech will eventually resume its leadership position,” he said. “There are always ups and downs, but the long-term trend is one of tech outperformance. We see light at the end of the tunnel we’re in.” BLOOMBERG
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