(Bloomberg) — U.S. technology and internet stocks fell sharply on Thursday as investors assessed the longer-term implications of the Federal Reserve’s hawkish policy on corporate balance sheets.
Megacap tech names initially saw a positive reaction to the Fed’s statement on Wednesday, with investors buying up shares of Apple Inc., Microsoft Corp. and Nvidia Inc., among others. But those stocks came under pressure Thursday, erasing most or all of their gains.
Mizuho Securities managing director Jordan Klein wrote that it is too early to tell whether the Fed gave a green light for growth names to continue rallying. Hedge funds and long-only investors “will take a bit of a wait and see in the next few days,” he said, adding that “many would rather buy growth and software stocks 5-10% higher and be sure of a sustained move upward versus see stocks roll back over and break lower.”
Apple shares declined 3.9% on Thursday, with the iPhone maker retreating further from a $3 trillion market valuation as it posted its worst day since March. Among other names, Microsoft fell 2.9%, Amazon.com slid 2.6%, and Nvidia shed 6.8%.
Beyond the market’s biggest names, other areas of tech were broadly lower. The Philadelphia Stock Exchange Semiconductor Index fell 4.3% in its biggest one-day drop since May, while the iShares Expanded Tech-Software Sector exchange-traded fund dropped 3.1%. The tech-heavy Nasdaq 100 fell 2.6%, with losses outpacing the rest of the market. The Dow Jones Industrial Average ended slightly lower while the S&P 500 fell 0.9%, with tech losses offset by strength in cyclical sectors.
Matt Maley, chief market strategist at Miller Tabak + Co., wrote that the stock market’s move higher in the immediate aftermath of the Fed appeared to be short covering, as opposed to “a fundamental reaction to the Fed’s announcement and Chairman Jerome Powell’s comments.” When equities were rallying on Wednesday, he noted, there was a lack of movement in the bond market. This “raises concerns that yesterday’s advance was merely a short-squeeze,” and “not something that tells us 2022 is going to be a good year for stocks.”
Even with the weakness on Thursday, megacap tech stocks remain among the most notable outperformers of 2021. Apple has risen nearly 30% thus far this year, while Microsoft is up 46% and Nvidia has more than doubled.
To be sure, a divergence has emerged within the technology sector.
“Technology is going through a metamorphosis. It’s turning into a stock picker’s market,” Daniel Ives, a senior analyst at Wedbush Securities Inc. in New York, said in an interview. “The ‘work from home’ trade is in the rear-view mirror now that the Fed is raising rates.”
Many of the social media and e-commerce companies that benefitted from Americans working remotely in the pandemic face growth challenges next year as unemployment falls and more employees get vaccinated to return to work, which gives the Fed the ability to lift borrowing costs to tame inflation, according Ives.
Although a rise in rates threatens to make shares of these companies with relatively high valuations less attractive in the near term, he expects that software, chipmaker and cybersecurity companies will continue to power technology higher in 2022 due to their strong earnings-growth potential.
“While investors continue to fret about valuations, earnings growth is still two-to-three times on a normalized level for tech,” Ives said, adding that it will help “drive software, chipmaker and cybersecurity stocks higher.”
(Updates to market close.)
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