Why So Many Tech Stocks Are Falling

Technology companies thrived when the pandemic began more than two years ago. But now, as much of the population returns to work and spends less time at home, the tech sector is suffering deep losses as investors fear that companies boosted by the pandemic are running out of steam.

The tech-heavy Nasdaq composite reported the biggest dip, closing on Monday down more than 4% after ending April with its worst monthly performance since the 2008 financial crisis. It rose 0.98% on Tuesday, but the broad tech selloff has nonetheless erased trillions of dollars in market value, with investors dumping shares of everything from semiconductor companies to gadget-makers and social media behemoths.

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. And shares of Apple, despite its record earnings last quarter, have dropped roughly 15% since early January. A recent revenue growth slowdown at Meta, the parent company of Facebook, led to a hiring freeze, amid a 47% drop in its stock price 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.”

Here are the three biggest factors driving the tech stock sell off.

Lack of 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, one of the most popular companies in the early days of the pandemic, announced Tuesday morning it lost $757 million in the first three months of the year, significantly more than analysts predicted. Shares of Peloton were down 13% by midday Tuesday, leaving the connected fitness brand with a market value of about $4 billion, down more than 90% from its high in early 2021 of $47 billion.

Another pandemic darling, Netflix, saw its shares drop roughly 75% from its record-high in November after losing 200,000 subscribers in its first quarter, with projections to lose more than 2 million more in the second quarter due to growing competition. The market value of Zoom, a popular virtual conferencing company that people relied on to stay connected while working from home or attending school, has dropped to $26 billion, slightly less than its value before the pandemic.

These earnings drops are perhaps the biggest signs that the pandemic bubble has burst, as more consumers shift their spending habits from digital, online experiences to real-world experiences, says Emily Bowersock Hill, chief executive of Bowersock Capital Partners, a financial management firm. 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.

Additionally, retail investors, who individually trade in the stock market, have started to lose their interest. During the pandemic, about 25% of stocks were traded by these non-professional investors, propped up by online trading platforms like Robinhood as people worked from home. Now, about half of those investors have left the stock market as more technology companies fail to meet earnings expectations and the market returns to reality. “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. But some analysts believe the selloff is irrational and has gone too far, given the necessity of many tech products. Dan Ives, managing director at Wedbush Securities, believes certain tech stocks like Apple and Microsoft have an upward 25-30% move for the rest of the year, while other e-commerce companies and work-from-home beneficiaries are likely to continue to crash.

“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!”

Rising interest rates

With inflation at its highest levels in 40 years, the Federal Reserve has begun to raise interest rates and will soon reduce its $9 trillion balance sheet to try to get prices back under control. Moves like these can make Wall Street anxious, as investors fear it could make borrowing more expensive for corporations and households, thereby stifling economic growth and potentially leading to a recession.

But Fed officials are trying to avoid that. Their approach, several policymakers have said, is to get interest rates above 2% by the end of 2022 in a way that does not disturb markets. “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.”

Still, analysts say the swift rise in interest rates has forced investors to rethink whether stocks that flourished in an environment with low interest rates would be able to continue to succeed in an environment with higher interest rates. The uncertainty and flurry of question marks is one reason investors are taking less risks on tech companies, which tend to perform worse when interest rates are higher and borrowing is more expensive.

“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 agrees a recession is possible, just not as severe as others are suggesting. “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.