This analysis was first published in SvD Näringsliv, in Swedish, on May 5th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
As the US central bank raises its benchmark rate, it may mark the end of the current tech boom. This spring has already delivered the largest drop since 2008.
“Finally, it’s over.”
That was the tone in October 2008 after the tech-heavy Nasdaq crashed 17.4 percent for the month. The fall came after investment bank Lehman Brothers went bankrupt and the world economy shook. It was the largest monthly drop on the US Nasdaq Composite in 20 years.
The second largest drop was more undramatic, almost quiet.
It happened last month, in April 2022.
In total, the Nasdaq Composite fell 13 percent, dragging the year-to-date figure down to minus 21 percent — the worst start to a new year in Nasdaq’s history. The broader Dow Jones Industrial Average (DJIA) and S&P 500 indexes were also down 9 and 13 percent respectively on a year-to-date basis.
What has happened to the tech companies?
Unlike 2008, it is not a single thing driving this, but several causes coinciding. Here are four factors putting pressure on tech companies right now:
Fear of interest rates
Yesterday, Fed chair Jerome Powell finally announced that the benchmark US rate would be raised by 0.5 percentage points — the sharpest hike since the year 2000. More hikes of the same size are expected this year. The changes were expected, and largely already priced in. But Powell’s decision not to raise rates by 0.75 percentage points did trigger a small sigh of relief in the markets.
For tech companies, this means competition for capital is increasing further. The yield on 10-year US Treasuries had its biggest monthly jump in April since December 2009. After Powell’s speech it rose again, and now sits at nearly 3 percent. If you can get that kind of return on what is considered all but risk-free paper, more capital will be allocated there. That comes in part at the expense of tech companies, as the tap of risk-willing capital is slowly being turned off.
The post-pandemic effect
Several tech companies saw an enormous boom during the pandemic, when many digital services saw their usage multiply. Few companies symbolise this more than the video service Zoom. The stock soared by several hundred percent during the pandemic and peaked in October 2020. Since then it has gone downhill. Looking back one year, Zoom has lost more than 67 percent of its market cap.
Despite the slide, the company is in all material respects stronger today, with both revenue and earnings higher than a year ago. But the market no longer views players that benefited from remote work and digital transition with the same confidence. Better results are therefore no guarantee of a higher stock price — at least not compared to pandemic highs.
Growth companies get re-rated
The positive sentiment towards growth stocks over recent years has now flipped, and that is hitting many tech companies hard. There is a general move toward risk aversion, probably influenced by an anxious global backdrop. In particular, the relatively recent IPOs that prioritised growth over profitability have been hit especially hard. Companies like Amplitude (analytics, down 68 percent year to date), Okta (identity management, down 47 percent year to date) and UiPath (automation, down 57 percent year to date) are all examples of this trend.
The pull from big tech is gone
At the start of the year, the smaller tech companies were dragged into the chill while the biggest giants held up. Because companies like Apple, Microsoft and Google are so disproportionately large in many funds, their success could mask the struggles of the smaller names. That time appears to be over, and even the very largest have fallen this year.
Worst among the giants is Meta, Facebook’s parent company, which has lost 34 percent of its market cap since the start of the year. Netflix has fallen so much — over 65 percent year to date — that it is no longer considered a tech giant. The previous acronym FAANG (Facebook, Apple, Amazon, Netflix, Google) has now been rebranded as MAMAA (Meta, Apple, Microsoft, Amazon, Alphabet).
