Tech Stocks Are Down. Here’s What That Means for the Economy

TWhen the pandemic hit more than two years back, technology companies flourished. The tech sector now faces deep losses, with investors fearing that pandemic-related companies will lose their steam.

Tech-heavy Nasdaq Composite reported the largest dip. It closed Monday with a drop of more than 4 percent after its poorest month since 2008’s financial crisis. The stock rose by 0.98% Tuesday but has still lost trillions in value due to investors selling off shares of all kinds of tech companies, including gadget-makers, social media giants, and semiconductor companies.

By midday Tuesday, Amazon’s shares were trading more than 40% below the company’s 52-week high of $3,773.08, a level previously unseen since February 2020. Apple shares have fallen 15% in January despite record earnings. Meta, which is the parent company behind Facebook, recently experienced a slowdown in revenue growth. This led to a freeze on hiring and an 47% fall in stock prices since September.

U.S. Treasury Secretary Janet Yellen told lawmakers on Tuesday that she and other top financial regulators wouldn’t be surprised to see market turbulence extend through the summer, as the pandemic and war in Ukraine may continue to add turbulence to the world economy.

“There is the potential for continued volatility and unevenness of global growth as countries continue to grapple with the pandemic,” Yellen said during a hearing on the Financial Stability Oversight Council’s annual report. “Russia’s unprovoked invasion of Ukraine has further increased economic uncertainty.”

These are three major factors that drove the tech stock market sell-off.

Insufficient earnings

Big Tech has shed over $1 trillion in value over the last three trading sessions as many of the world’s biggest companies are still reeling from the effects of not meeting earnings expectations.

Peloton was one of the most loved companies during the initial days of the pandemic. It announced Tuesday that it had lost $757m in its first three months, which is significantly higher than what analysts expected. Peloton shares were down 13% Tuesday midday, leaving Peloton’s connected brand of fitness with a market worth of $4 billion. This is more than 90% less than its peak in the early 2021 at $47 billion.

Netflix was another pandemic-favorite. Its shares fell 75% after it lost nearly 200,000 subscribers. There are projections for more than 2,000,000 more to go in the second quarter because of growing competition. Zoom has a market value of $26 billion. It was a well-known virtual conferencing service that many people trusted to keep them connected, whether they were at school or working remotely.

According to Emily Bowersock Hill (chief executive at Bowersock Capital Partners), a financial management company, the earnings drop is one of the strongest indicators that the pandemic has burst. This happens as consumers switch from digital and online spending patterns to more real-life experiences. But persistent supply chain backlogs and elevated prices have left consumers with a strain in their pocketbooks, and there’s no clear answer for when that will change.

Also, individual retail investors trading in the stock markets have lost their interest. These non-professional investors traded 25% of the stocks during the Pandemic. This was supported by Robinhood and online trading platforms such as Robinhood, which allowed people to trade from their homes. About half of these investors have now left the stock exchange as technology companies continue to disappoint earnings and the market becomes more real. “It’s a factor that people are not talking about enough,” says Bowersock Hill. “A lot of buyers have decided to sit out of the market for a while.”

As investors weigh these risks, Wall Street is casting doubt on Big Tech’s ability to maintain the momentum needed to justify high valuations spurred by the pandemic’s unprecedented demand for new technology. Some analysts think the selloff has been too extreme given the importance of so many tech products. Wedbush Securities managing director Dan Ives believes that certain tech stocks, such as Microsoft and Apple, will see an upward 25%-30% movement for the remainder of the year. However, other ecommerce businesses and beneficiaries who work from home are more likely to fall.

“It’s easy to yell fire in a crowded theater when panic is in the air,” he wrote on Twitter. “If you think cloud adoption, cyber security, enterprise spend, EV adoption, and buying iPhones are going away and falling off a cliff then go with your negative tech thesis!”

Inflation rising

Inflation at its highest level in over 40 years has prompted the Federal Reserve to increase interest rates. It will also soon decrease its $9 trillion reserve to help bring prices under control. Wall Street is often anxious by such actions, because investors worry that it will make borrowing more costly for businesses and homes, which could lead to economic slowdown and even a recession.

Officials at the Fed are working to prevent that. Multiple policymakers agree that their goal is to increase interest rates at 2% until 2022. This will not disrupt the market. “You could argue the Fed should have started doing this earlier,” says Bowersock Hill, “but it had no choice in order to maintain credibility and get inflation under control.”

Analysts warn that investors need to question whether stocks which have performed well in low rates of interest will continue to do so in higher-interest environments. Investors are less likely to take on risk with tech companies because they are more uncertain and have more questions. Tech companies tend to do worse when borrowing costs are higher and interest rates are higher.

“Investors who look into the future and hold onto tech companies with growth potential aren’t receiving much cash flow,” says Bowersock Hill. “That’s what happens when interest rates go up: the value of a company’s growth declines.”

Concerns about the economy’s direction

It’s difficult to predict what the economy will look like months from now, as some analysts fear the rising interest rates could send the economy into a recession highlighted by a decline in spending—particularly for niche technology products. That concern was escalated by a report from the Bureau of Economic Analysis that said the nation’s economy unexpectedly shrank at a 1.4% annualized rate in the first three months of 2022, despite more than a year of rapid growth.

Deutsche Bank, for instance, said last month that it expects a major recession in the U.S. next year, claiming in a report to clients that it’s “highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel.”

Peter Schiff, CEO and chief global strategist at Euro Pacific Capital, has a similar ominous forecast: “The entire U.S. economy is about to shut down again, but this time it won’t be a dress rehearsal like with [COVID-19],” he wrote on Twitter. Bowersock Hill is not convinced that a recession could be effected, but it’s possible. “The fundamentals of the economy are still very strong,” she says. “We have excellent job numbers, good earnings and consumers have a lot of money on their balance sheets.”

But when people see reports about a possible recession, it can “take a hold on industrial consciousness” and have a “dampening effect” on the economy, Bowersock Hill adds.

As economists try to predict the economy’s broader direction, it seems many are looking at the recent tech stock nosedive as an early indicator of what could happen if a recession hits.

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