Tech Stocks Are Falling. That’s A Bad Sign For The Economy

With a slew of technology companies reporting financial results this week, all eyes are on how investors will respond after a series of recent disappointing results from the biggest names in tech—including Alphabet, Microsoft, Meta, and Amazon—rattled investors about the industry’s outlook.

As tech stocks continued to take a beating this week, Wall Street analysts warn that could be bad news for the broader economy, as lackluster earnings results likely signal that inflation and high interest rates are squeezing households and businesses more than expected.

The latest slump adds to an already disappointing year for tech stocks, which were some of the biggest winners during the early stages of the pandemic. The tech-heavy Nasdaq has lost almost 30% of its value this year, compared with the S&P 500’s 19% decline since the beginning of 2022. The Nasdaq’s tumble was hastened late last week by weak third quarter earnings from Alphabet, Microsoft, Meta, and Amazon—all industry heavyweights that financial analysts often look to when assessing the economy’s outlook.

This quarter’s earnings season will go down in the history books “as one of Big Tech’s worst” and could be a “fork in the road moment” for some of the biggest companies, wrote Wedbush Securities analyst Dan Ives in a recent research note.

“In this softer macro and a recession likely on the doorstep, Big Tech management teams needs to quickly adjust to a much different backdrop or risks losing its luster for investors that have bet on these tech thoroughbreds for the past decade,” he said.

Among big tech companies, Apple has been an outlier of late. Its shares are down nearly 16% since the start of the year, but in the last month, its stock price is up more than 7%, thanks in large part to an increase in Mac sales and growing revenue. Analysts say Apple is in better shape than its Big Tech peers since demand for its products remains high around the world, even in emerging markets, despite a decline in global sales for smartphones and PCs.

This week, analysts will turn their attention to a host of smaller tech companies, including AirBnB, eBay, Qualcomm, Paypal, Uber and Zillow, for a deeper reading of the economic forecast.

Here’s what you need to know about the tech stocks slump.

Why tech stocks are plummeting

Wall Street analysts say a number of factors are knocking the wind out of the markets, including the highest inflation in 40 years, rising interest rates, and the strong U.S. dollar—which hurts multinational companies since they earn less when converting their foreign sales into dollars.

The Federal Reserve last raised interest rates in September by 75 basis points, which means consumers will pay more for interest on vehicle financing and other loans. 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.

Moves like these can make Wall Street anxious, as investors fear rising interest rates could make borrowing more expensive for corporations and households, thereby stifling economic growth and potentially leading to a recession.

Tech companies are also finding it more difficult to grow sales as digital advertising and other revenue streams slow. “All of these companies are to some extent dependent on advertising revenue,” says Emily Bowersock Hill, chief executive of Bowersock Capital Partners, a financial management firm. “That is a real sign of weakness in the economy that those revenues are declining,” adds Bowersock Hill, who is also chairwoman of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion.

Microsoft, which is down 1.59% at closing on Monday, reported its weakest quarterly revenue growth in five years, throttled by rising energy costs and a slump in sales of Windows software to personal-computer makers. Sales growth in its cloud business was also lower than analysts had hoped.

Alphabet, Google’s parent company, announced that its profit dropped 27% over the previous year as advertisers spent less on marketing for insurance, loans and mortgages. The company’s revenue of $57.27 billion was also slightly lower than Wall Street expected. Its stock is down 1.85% at Monday’s close.

Meta’s stock dropped to its lowest level since 2016 on Thursday, down more than 20%, after it reported a second quarterly drop in revenue and rising costs at its money-losing metaverse division. Meta’s stock fell another 6.09% by closing on Monday.

Amazon shares plunged 7% on Friday after the company predicted weaker holiday sales than analysts had expected. The company’s cloud business also reported its slowest growth rate since 2014. Amazon fell another 0.94% by closing on Monday.

“When we’re getting these kinds of declines, it’s a clear signal that the economy is slowing down,” says Bowersock Hill. “The fact that Big Tech earnings are coming in worse than expected is a big indicator about the broader economy.”

The difficult road ahead

Despite the uncertainty around Big Tech stocks, the overall economy isn’t in terrible shape. Usually when consumers feel badly about the economy, they start to pull back on spending, which accounts for more than two-thirds of all domestic economic activity. But consumer spending expanded in the July-September quarter, and the U.S. economy returned to growth, snapping two straight quarters of economic contraction despite high inflation and interest rates.

Even so, disappointing earnings from the tech heavyweights may turn the broader market south, given the immense market value of those stocks and the industry’s tendency to foreshadow where the economy is headed. Tech stocks are particularly sensitive to inflation, rising interest rates and a strong dollar, similar to the broader economy.

“It looks like we are going to hit a recession and tech companies have to get prepared for it,” says Dr. Soudip Roy Chowdhury, CEO of Eugenie.ai, a sustainability tech company. “Some of the biggest tech companies are already slowing down hiring, some will have layoffs.”

Alphabet CEO Sundar Pichai said on the company’s earnings call that Alphabet would have to be “responsive to the economic environment,” suggesting that cost-cutting measures like layoffs are coming. Additionally, Amazon Chief Financial Officer Brian Olsavsky said that the company would be “taking actions to tighten our belts, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere.”

But financial analysts like Bowersock Hill don’t believe the market will see the same lows as it did earlier this summer, when investors dumped shares of everything from semiconductor companies to gadget-makers—at least not right now. “We may not actually see the full impact on earnings of rate hikes and the significant appreciation of the dollar until the fourth quarter earnings season,” she says. “We’re going to have a hard winter. I think the Big Tech earnings are just indicators of the cracks starting to appear.”