The stocks of U.S. technology companies are off to their worst start to a year since 2016 as concerns about rising interest rates lead investors to seek cyclical and value securities.
Following multiple failed attempts at a rally, investors remain hesitant to plow back into shares of growth stocks and there’s still no major signs that the downward pressure on technology companies will end anytime soon.
The NASDAQ 100 Index, which includes some of the biggest technology stocks, is down more than 4% this year, even after a bounce late Friday (January 14) that erased its losses from earlier in the week. The broader NASDAQ Composite Index fell for a third straight week.
High-flying growth stocks are being particularly hard hit by fears that the U.S. Federal Reserve will start withdrawing the massive monetary stimulus that has kept the financial system awash in cash since the global pandemic hit.
Worries about rising rates were fueled by data this week showing that U.S. consumer prices soared last year by the most since 1982 while U.S. retail sales fell in December by the most in 10 months, indicating that higher prices may be dissuading consumers.
That threatens to put further pressure on technology stocks with valuations based on future profit growth, since higher interest rates reduce the present value of expected earnings.
The market is widely expecting the U.S. central bank to start raising interest rates in March and begin reducing its stockpile of bond holdings in the second half of this year, removing a source of support for the Treasury-bond market.
Even with the recent volatility, the technology sector by and large remains a long-term outperformer relative to the overall market. The Philadelphia Stock Exchange Semiconductor Index is up nearly 40% since the start of 2021, while the S&P 500 information technology index is up 27%.
The overall S&P 500 index is up about 24% over that same period, with names like Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL) all outperforming the benchmark index.
One exception is the software industry, which has seen some of the heaviest pressure as investors rotate out of high-valuation growth shares. Since hitting a peak last November, the iShares Expanded Tech-Software Sector exchange traded fund (ETF) has been on a pronounced downtrend, with drops during the past three weeks that have driven it back to where it was at the end of 2020.
