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The Great Retrenchment: Tech Stocks in 2022

Delwin Graham - Apr 25, 2022
The reversal of some of 2021’s hottest stocks has also hit the tech sector in 2022. Pandemic winners have had to face the situation where many COVID-related tailwinds have died down.

The first quarter of 2022 has been particularly hard on US tech stocks. To this point, the tech-heavy Nasdaq 100 Index (QQQ:NYSE) has fallen about 15 percent year-to-date (April 16, 2022).

What is going on? Granted that geopolitical tensions (i.e., the Russia-Ukraine War) and supply-chain problems (i.e., the microchip shortage) have had an effect, but concerns over rising interest rates and surging bond yields have driven down the market premium for future profits. When the value of a riskless return goes up (e.g., a treasury yield minus inflation), the value of a risked return goes down, and tech stocks certainly represent the prospect of a risked return.

The reversal of some of 2021’s hottest stocks has also hit the tech sector in 2022. Pandemic winners have had to face the situation where many COVID-related tailwinds have died down. In 2020 and 2021, the US Federal Reserve took extraordinary measures to support financial markets and reassure investors that it wouldn’t let major corporations fall apart. Congress also pumped trillions of dollars into the economy across multiple relief bills. The end of these programs is seen to limit the capital that was previously available to the tech sector. (Cf., Subrat Patnalk, “Winners and Losers in Whirlwind $1 Trillion Tech Stock Rout,” www.bnnbloomberg.ca, March 31, 2022)

As a result, Wall Street is punishing many of the former stars of the pandemic era. Here is how –

Moving to a Post-Pandemic Economy. Companies that thrived during COVID lockdowns have fallen as demand for their services has subsided now that consumers have ventured out of their homes. For example, Peloton Interactive (PTON:NASDAQ), home-exercise-equipment manufacturer, has slumped about 36% since the beginning of the year, and DocuSign (DOCU:NASDAQ), electronic-signature-solutions provider, is down approximately 35%.

Social Media Slump. Facebook parent, Meta Platforms Inc. (FB:NASDAQ), which draws almost all of its revenue from ad sales, has tumbled 37%.

FAANGs Are Divergent. The fortunes of the high-profile FAANG stocks – Facebook, Apple, Amazon, Netflix, Google – have been split in the post-pandemic recovery. While Amazon (AMZN:NASDAQ) and Apple (AAPL:NASDAQ) have traded flat, Netflix (NFLX:NASDAQ) and Meta Platforms have been hit hard – down 37% and 44% respectively. The NYSE FAANG+ Index is down almost 21% this year.

Cybersecurity Is Still Hot. While cybersecurity firms were pandemic winners, Russia’s invasion of Ukraine has sparked a rally in digital defense stocks like CrowdStrike Holdings Inc. (CRWD:NASDAQ) and Palo Alto Networks (PANW:NASDAQ).

Rising Profit Expectations. All in all, the fourth-quarter-earnings season has been a strong one for the tech sector with companies like Apple and Microsoft Corp. (MSFT:NASDAQ) providing upbeat forecasts. According to Bloomberg data, about 87% of the sector has beaten profit estimates. While that’s down from the third quarter (92%), it is good enough to top all of the other main sectors in the S&P 500. (Cf., Jeran Wittenstein, “A Rising Profit Outlook for Tech Stocks Is No Match for Economic Angst,” www.bnnbloomberg.ca, March 10, 2022)

The disconnect between falling stock prices and rising profit expectations speaks to the level of anxiety about the effects of anticipated interest-rate hikes by the US combined with high inflation and Russia’s invasion of Ukraine. Also, keep in mind that while the 13% profit increase expected for tech is better that the 9% estimated for the S&P 500, it is much less than other sectors like consumer discretionary and energy, whose growth is expected to exceed 40% in 2022. (Cf., Wittenstein, “A Rising Profit Outlook …”)

The tech sector is retrenching. But has it bottomed? What is considered “fair value” will depend on certain macro-factors (e.g., inflation and interest rates) and company-specific variables (e.g., predicted growth rate). And so, we are in a stock-pickers market. Please contact me at dgraham@cgf.com or 780-408-1518 for a few tech stocks that we are picking.