After years of screaming higher, almost regardless of what the economy was doing, tech-focused stocks are crashing and dragging down the rest of Wall Street
NEW YORK — After years of screaming higher almost regardless of what the economy was doing, tech-focused stocks are crashing and dragging the rest of Wall Street down.
Many of these top companies still make billions of dollars in profits and continue to dominate the rankings of the most valuable companies. But two big shifts have caused their stocks to come back on Earth this year: interest rates are rising, and expectations of their continued strong growth suddenly seem much more fragile.
Take Netflix, whose stock more than tripled from the start of 2018 to its peak last November. It has since lost virtually all of that gain, dropping more than two-thirds this year alone for the S&P 500’s worst loss on Tuesday.
Similarly, Facebook’s parent company Meta Platforms has lost almost half of its value this year. Neither company falls into Wall Street’s “technology” classification; instead, they are categorized as “communications services” companies, along with many other internet-related stocks.
But they are both part of the Nasdaq Composite Index, alongside tech heavyweights like Apple and Microsoft. And the Nasdaq is on course for its worst month since the 2008 financial crisis. Its 20.2% drop for the year on Tuesday was much worse than the S&P 500’s 12.4% drop or the 8.5% of the Dow Jones Industrial Average, which is less technology driven.
Technology stocks in the S&P 500 are down 19.8% for the year through Tuesday, while the index’s communications services stocks fell even more, down 24.1%. The rest of the S&P 500 fell just 6.9%.
Tech-focused stocks struggled largely because interest rates hit their highest levels in years. The 10-year Treasury yield, for example, recently rose above 2.90% after starting the year at 1.51%, although it has fallen in recent days. Yields jumped as the Federal Reserve prepares to raise short-term rates sharply to stamp out high inflation. It also includes other measures to push up longer-term rates.
Higher interest rates are holding back all kinds of investment. Now that a 10-year Treasury is poised to offer a real return for the first time since the pandemic, after factoring in inflation, investors can make money by parking in safe bonds . This makes them less willing to pay high prices for riskier investments. High-growth, tech-focused stocks are now the hardest hit, as their prices have climbed the highest before.
Netflix, for example, started 2022 with a stock price at 45.6 times its expected earnings per share over the following 12 months. That was more than double what investors were willing to pay for every dollar of expected earnings from the entire S&P 500.
Investors were comfortable paying such high prices for Netflix and tech stocks in general when interest rates were extremely low. They were also willing to stretch for stocks of companies capable of strong growth even when the global economy was suffering.
But now rates are rising and continued growth looks less assured. Netflix recently reported a decline in subscriber numbers for the first three months of the year, for example, with more losses expected in the spring. People have more entertainment options now that pandemic restrictions are being eased.
Alphabet, Google’s parent company, said on Tuesday its revenue growth in the last quarter slowed to its lowest pace since 2020. Analysts pointed to slowdowns in search and YouTube in particular.
Shares of semiconductor companies have also lagged this year, in part due to fears that demand for smartphones, personal computers and other hardware could weaken after sales surged during the pandemic. An index of semiconductor stocks has fallen 26.3% this year, a sharp decline after climbing more than 40% for three straight years.