TAll stocks have fed a New Year’s hangover, pushing the Nasdaq into correction territory. Momentum is building against companies with exciting promises to reshape the world as investors turn to “value” alternatives such as oil and banks.
The tech sector is now two weeks from a slump as its biggest names report results including Microsoft on Tuesday, Tesla on Wednesday and Apple on Thursday. They must prove they can thrive in a post-lockdown world where the declining cost of living is leaving people with less money for tech products and services.
“The outlook for the Nasdaq 100 will be a lot clearer in two weeks,” says Matt Weller, global research director at Forex.com and City Index. Weak earnings reports or weak forecasts could result in the index getting off to one of its worst starts in over a decade.
Though a hesitant return to normal life has now been shattered by Omicron, smaller growth stocks like pandemic winners Peloton and Zoom have been under pressure for months. A near-record number of tech stocks have recently fallen at least 50% from their all-time highs.
The tech giants’ stocks had an incredible run, helping the S&P 500’s IT index to blockbuster returns of 33% in 2021. But the sector lost about 10% in January.
Fears of US interest rate hikes are hurting unprofitable tech companies that promise big profits in the future. The Federal Reserve, which meets this week, is likely to hike interest rates several times this year in a bid to tame US inflation, which is now at its highest level since 1982.
The year 1982 was also when time Magazine presciently chose the personal computer as Person (or Machine) of the Year. Then the idea of a company being worth $3 trillion would have been staggering. Apple surged to $3k in early January (but is down 7% since then) and needs to overcome issues in global supply chains to continue to justify such a high valuation.
Analysts are predicting that Apple’s revenue rose 6% year over year in the most recent quarter, beating last year’s record profit of $111.4 billion. Profits could increase by 13%. But there’s still a risk of a significant slowdown in momentum, AJ Bell’s Russ Mold and Danni Hewson warn – “due to the difficult basis of comparison caused by the huge spike in demand for iPhones, iPads and iMacs in 2020-21 , while people were working from home, trying to keep in touch with people they couldn’t meet, or fighting boredom by searching online for things to do and see.
After beating production targets last quarter, Tesla may have more to say about the future as investors and customers alike eagerly await when long-awaited models like the Cybertruck pickup and Roadster sport model hit the road. Interest in both is high, but Tesla’s shares fell this month after references to the cybertruck, which went into production this year, disappeared from its website.
And even if the tech giants hit their numbers, they’ll still be under scrutiny. Meta, owner of Facebook, which reported Feb. 2, is being targeted by regulators intent on taking it down, and Federal Trade Commission Chair Lina Khan is vowing not to back down.
Khan is a competition law expert who published a landmark paper titled “Amazon’s Antitrust Paradox” while still in college. It has been argued that the traditional framework of competition law is inadequate to evaluate the digital giants and that a more comprehensive framework is needed. Amazon and Facebook claim Khan should be removed from antitrust investigations because she is not impartial. But their expertise might be just what’s needed to keep big tech at bay.