(Bloomberg) — For tech investors, it’s been the worst start to the year in two decades. And with another hike in the Federal Reserve’s interest rate seen next week, they are bracing for more volatility.
The Nasdaq 100 Index has been hammered this year — wiping out more than $1.8 trillion in value in April alone — amid a tumultuous earnings season as investors fear an economic slowdown and ever-more aggressive expectations around the Fed’s rate-hike trajectory.
The tech-heavy benchmark has seen a close of at least 2% in either direction on about 47% of trading days this month, the highest percentage since March 2020, according to data compiled by Bloomberg.
The central bank’s next decision due on Wednesday is likely to make for another rollercoaster ride. It is expected to raise rates by 50 basis points at that meeting with nearly 200 basis points of further interest-rate hikes projected by the end of this year, according to data compiled by Bloomberg. Higher rates are especially negative for technology stocks that are valued on future growth expectations.
While a hike in the 50-basis point magnitude may be priced in by the market, the decision comes as investors continue to assess a multitude of earnings reports, including some big misses, forecast cuts and the drama around Elon Musk’s agreement to buy Twitter Inc., including his $4 billion sale of Tesla Inc. shares.
“Earnings season is always eventful and this one certainly has lived up to that, as investors are interested to see if companies can continue to maintain high profit levels through inflation,” said Matt Carvalho, chief investment officer of Cardinal Point Wealth who oversees about $1.2 billion in U.S. and Canadian stocks. “But without a doubt the biggest question on everyone’s mind is how this Federal Reserve rate tightening cycle will play out.”
Here’s a look at what’s next for tech stocks in charts.
The selloff in the Nasdaq 100 this month has been so swift that at one point this week its blended forward 12-month estimated price-to-earnings ratio sank to less than 22, its lowest level in two years. Back in mid-March the benchmark nearly broke the same level before staging a strong two-week rally.
That discount may have lured dip buyers back. “Megacap tech valuations are very attractive at the moment, given how underlying growth fundamentals remain very strong,” said Pat Burton, who manages about $16 billion as a co-portfolio manager at Winslow Capital Management.
The tech-heavy gauge surged on Thursday in its best day in more than a month as opportunistic investors emerged to take advantage of lower valuations and as strong earnings reports from Meta Platforms Inc. and Qualcomm Inc. helped boost investor sentiment. Now, that rally is in jeopardy after Apple Inc. and Amazon.com Inc.’s quarterly results sparked a selloff in tech stocks. The Nasdaq 100 fell as much as 1.7% Friday.
Still, Wall Street is staying bullish on the group. While the index is set to close the month with a decline of more than 9% — the first monthly drop of that magnitude since late 2008 — analyst price targets have largely remained intact.
The benchmark’s 12-month potential return, which is calculated by aggregating the average price targets of index constituents, stands at about 28% above its close on Thursday. Hitting that mark would send the gauge to a fresh record high.
To be sure, the price-targets are unlikely to be fully reflecting the changes, both up and down, that result from quarterly earnings as it can sometimes take weeks for analysts to fully incorporate them into their models. Some of the Nasdaq 100’s largest members, including Alphabet Inc., Amazon, Meta and Netflix Inc., have already started to see price target cuts flow in following their earnings releases.
One group of stocks that could sway the sector have yet to report: pandemic darlings. Many stay-at-home stocks have tumbled from their Covid-driven highs, with Netflix showing they may still have room to fall if their results disappoint. Zoom Video Communications Inc., DocuSign Inc. and Peloton Interactive Inc. are some of the biggest losers since pandemic restrictions were lifted. The trio has yet to report results with some slated for next month.
All in all, tech investors still have a lot to worry about.
“While it is difficult to know how long the current turbulence for growth stocks will continue, inflation concerns and the prospect for rising interest rates are not going away any time soon,” said Jason Hollands, managing director of online investment platform Bestinvest.
Tech Chart of the Day
As investors head into next week, rate-hike expectations have only been building amid a selloff in tech stocks. The rout was exacerbated this month when traders priced in big rate increases and after Federal Reserve Chair Jerome Powell blessed a half-point interest-rate hike next month and signaled support for further aggressive tightening to curb inflation.
Top Tech Stories
- Apple Inc. predicted that supply constraints would cost $4 billion to $8 billion in revenue during the current quarter, a warning that sent the shares tumbling and cast a pall on record-setting results that the company just reported.
- Amazon.com Inc. acknowledged that a hiring and warehouse-building binge during the pandemic is catching up with the company as e-commerce sales growth inevitably slows from the torrid pace of the outbreak.
- U.S.-listed Chinese stocks rose sharply across the board, after Beijing’s top leadership pledged more stimulus to rescue an economy hampered by extended Covid lockdowns in major cities.
- Intel Corp., the world’s biggest maker of computer processors, gave a disappointing second-quarter sales and profit forecast, indicating weaker demand for its chips across the board.
- Elon Musk sold about $4 billion worth of Tesla Inc. stock days after reaching a $44 billion deal to buy Twitter Inc. Musk has now disposed of more than $20 billion worth of stock in the electric-car maker during the last six months.
(Updates share move in the tenth paragraph.)
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