Author: Geoffrey Young
Many investors are disappointed by the performance of tech stocks this year. But the worst may yet to come as tech stocks may find it difficult to rebound from this year’s losses.
Why Tech Stocks May Struggle to Recover this Year’s Losses anytime soon
2022 hasn’t been the best year for tech stocks. Currently, the Nasdaq Composite (^IXIC) is down by 18% despite experiencing its best times since the pandemic lows.
DocuSign (DOCU) is almost 80% lower than last year, while PayPal (PYPL) is below 70%. These are just a few wipeouts investors are facing in the tech sector.
Investors struggle with the thought of opening their brokerage statement only to be greeted with losses. However, the struggle might not be gone anytime soon.
According to Liz Young, the head of investment at Sofi – “we’re in a situation of high inflation and tighter monetary policies, which results in higher discount rates. As long as rates remain high, there’s a headwind for tech or a ceiling on these high growth stocks.”
The federal reserve is moving to control the rapidly rising inflation by raising interest rates, which leaves these stocks vulnerable to the market decline.
Another issue tech investors face is the valuations that are getting more challenged by the rising risk-free rates. Also, the numerator in the P/E (price-to-earnings) ratio has fallen, and earnings remain flat at a little below $200 per share for the S&P 500 (^GSPC).
Even stocks valued on a price-to-sales ratio aren’t looking much better.
For the P/E status, either price rise, or earnings fall, we’ll find out which way it goes as the earning season draws closer.
In reality, it’s still too early to predict, and price may seem to matter more than P/E ratios in this situation.
However, the fear of recession is growing as rates are rising, and growth is slowing, causing bond traders to bet on future rate cuts.
However, the Fed’s pricing and some measures of the bond market might begin to ease as early as Q1 of 2023.
A combination of lower rates and easier monetary policies may be what tech investors need to recover and get back on track.
When we look at some major players within the last two market blows, we understand how difficult it may be for investors to recoup heavy losses and get back to breaking even.
Conclusion
2022 has been hard on tech companies, and certainly for investors of these companies. Other factors like the war in Ukraine and a looming global recession also have a hand to play.
While it may be difficult for investors to recover their losses on tech stocks, it’s not impossible, and the future may have a different story to tell.