Why technology companies are suffering historic losses on the American Stock Exchange

After achieving spectacular profits during the pandemic, the stock market has been recording a bad year in 2022.

Investors have been suffering losses, even those who bet on securities considered safe, such as those of technology companies, which had been showing good results for years – until now.

In downtown New York, in the United States, surrounded by the lights and electronic billboards of Times Square, is Nasdaq, the stock exchange specializing in technology companies. Until June 15, the Nasdaq index, which reflects the fluctuations of the set of shares traded on that exchange, fell by almost 32%.

“It’s one of the biggest drops ever suffered by Nasdaq in its entire history,” says Eduardo Carbajal, professor of economics and finance at the Instituto Tecnológico de Monterrey, Mexico. And, this scenario did not improve in the month of June.

Not even the so-called “big techs”, such as Meta (parent company of Facebook), Amazon, Netflix, Apple and Alphabet (parent company of Google), have escaped, suffering double-digit percentage drops.

WHAT’S UP?

Markets are volatile. Investor sentiment, what they expect to happen in the future, is what determines stock prices on the stock market. And, in 2022, investors have tended to get rid of these assets, because they understand that they will not receive the expected return.

“My hypothesis is that many technology companies were overvalued”, argues Carbajal. “It is not possible for Tesla to have a higher market value than any historically car-producing company.”

There are several factors influencing the current mood of investors. The first is high inflation, a widespread phenomenon in the world in 2022.

In the United States, for example, the annual rate reached 8.6% in June, the highest in the last 40 years. Inflation brings uncertainty, which is bad for markets.

To try to stem the tide of inflation, central banks are raising interest rates, which drives up the cost of capital. In Washington, the Federal Reserve (the US Central Bank) has decided to raise interest rates and is showing signs that it will continue this trend.

This mainly affects companies that, taking advantage of the very low interest rates of recent years, have received cash injections.

“When expectations change and interest rates rise, these stocks tend to suffer more than those of companies with more weight in indices such as the Dow Jones, of more traditional companies,” Nicolás explained to BBC News Mundo (BBC Spanish service) Max, director of the Argentine company Criteria Asset Management.

The rise in the cost of credit also made investments in US Treasury bonds more attractive, which meant that part of the capital flow was redirected to this type of asset, which is seen as safer. But that cools the economy and lowers companies’ earnings expectations, making their shares less attractive.

These two factors together produce an economic bomb known as stagflation: a reduction in economic activity with a constant rise in prices. And when people have less money in their pockets, they tend to spend less on non-essentials.

Allied to this, the confinements imposed in China due to Covid-19, the war in Ukraine and the possibility of new health crises raise doubts in the equation.

THE ‘BIG TECHS’

“The size of the drop is determined by the stocks that have the most weight and dominate the Nasdaq,” says Max.

These tech giants are Facebook, Apple, Amazon, Netflix and Google, which form a group of companies called FAANG. And, in addition to them, there is another more traditional company among the big ones: Microsoft.

“In the first half of the year, we saw earnings declines in relation to expectations of stocks very representative of technology indices, such as Facebook, PayPal and Netflix”, says Max.

The market value of Facebook, Apple, Amazon, Microsoft and Google combined fell by US$ 2.7 trillion (R$ 13.8 trillion) between the beginning of 2022 and May 19, according to The New York Times.

“Stock prices are returning to their possibly real levels,” says Carbajal. And the big companies have a drag that always puts smaller companies on alert, which end up falling like dominoes.

The strange thing about this story is that, despite the fall of technology companies, they continue to have open boxes and continue to spend.

This is reflected in significant salary increases for its employees in 2022 and even in new hires at some companies, in addition to new investments in projects, according to the US press.

“The companies that lead Nasdaq are very solid and, when all this is over, they will have strong recovery power. A sample is the projects they are developing”, explains Carbajal.

BUT WILL THERE BE RECOVERY?

Investor mood still doesn’t seem to have bottomed out, which will affect the share price of companies listed on Nasdaq.

“From now until the end of the year, we do not foresee improvements in macroeconomic conditions that could lead us to imagine that [a queda] will be contained or that a minimum level will be reached”, according to Carbajal.

For Max, “the question is whether or not the US economy is heading for a recession, how serious the economic slowdown is and, therefore, how much will be the downturn in corporate profits going forward. This uncertainty is basically what weighs.”

“If price pressures persist, US monetary authorities will face a scenario in which recession will be the price to pay to keep their credibility intact and stocks still have a way to go in their downward trend,” he concludes. .

– This text was originally published here.