Tech Stocks Sell Off: Why Does It Happen and What Is the Outlook?
Tech stocks have been in a downward spiral since Q4 2022. Even the stocks of big and world-renowned companies have significantly dropped in value. The NASDAQ 100, a stock index containing the biggest tech firms listed in the U.S., dropped from nearly 16,000 points in November 2021 to around 11,000 points in June.
Reasons for the Sell-off
There are several reasons why tech stocks have recently lost value. As inflation is rising, the U.S. central bank started to increase interest rates. As tech stocks often do not generate much revenue today, their valuation is based on future cash flows. Rising interest rates mean that these future cash flows are less valuable today. As a result, the stock prices of tech stocks, which are the combined present value of their future cash flows, had to decrease.
Another reason tech stocks lost value is that they have been the biggest winners since the COVID-19 crisis started. This was due to an increased demand for technological solutions during the pandemic, such as for people working from home offices. As the pandemic faded, some of these earning premiums had to be reduced.
A third struggle that impacts the entire economy but even more so tech companies is the lack of certain raw materials and product components. For example, there have been lockdowns in China, so the supply of semiconductor microchips has been affected. This has been a problem since they are crucial for the production of many technological goods.
Tech stocks have now lost enough value to come back to reasonable valuations. That said, if the U.S. economy slides into a recession, tech companies’ earnings will also be affected. If earnings deteriorate, stock prices will fall further.
“A U.S. recession is not inevitable,” says U.S. President Joe Biden. Many analysts, however, have a more pessimistic view of the economy.
At the moment, it is very difficult to say what the outlook for tech stocks will look like. A lot of it will depend on the further development of the economy, the outlook for interest rates, and the supply situation in the global market.
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