Sector Wide Struggle

The stock market has stumbled this year and its technology segment is getting hammered. The S&P 500’s information technology sector is down nearly 20% this year with the broader index down only 13% by comparison. The tech rout is evident with industry leaders such as Facebook parent Meta Platforms (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL) all underperforming the S&P 500 overall.

Investors who seemingly couldn’t get enough of these companies during the pandemic’s period of easy money are now fleeing for the exits. Technology funds have seen $7.6 billion in outflows this year.

Shades of the 2000s?

In today’s environment, where the Fed’s recent rate increases may be just the first of many to come, investors seem to have tempered their enthusiasm for tech stocks. When interest rates rise, investors require a higher return on equities to make the higher risk worthwhile relative to bonds or cash. One way to get to this higher return is to pay less, so rising rate environments can put pressure on equity valuations.

While the downturn in tech may trigger memories of the dot-com collapse in 2000, in which the Nasdaq plummeted by 80% over roughly one and a half years, others counter that valuations aren’t at the levels seen during that period, when forward multiples soared to 26.2. By comparison, the tech-heavy NASDAQ’s current price-to-earnings ratio is around 20.

Value’s Comeback

Despite the sell off, technology stocks still comprise 27% of the S&P 500 index. Treasury yields have gone up, but still remain below historical norms. All eyes will be on the Fed as it attempts to tame inflation by raising interest rates. This will be especially true tomorrow when the latest CPI data is due.

Some market analysts contend the worst is over. Others, such as value investment firm GMO’s Ben Inker, say the valuations of technology stocks and growth stocks in general have grown too risky, which arguably makes value stocks look more attractive. Inker also warns that when asset bubbles pop, valuations can decline below fair value.

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