The S&P 500 information and technology sector has lost 20% year-to-date through June 8, 2022, the worst performance in 20 years. As the larger economy has deteriorated, the tech industry is facing a new reality check. Every week, tech businesses are laying off employees and declaring hiring freeze, and as tech stocks fall and cryptocurrencies drop, the market sentiment is warning of a looming recession.
The Great Fall
Individual tech stocks have reported some of the steepest drops in history in 2022, with hundreds of billions of dollars in market value vanishing. Snap Inc.'s stock dropped 43% in a single session in late May 2022, the company's worst one-day percentage drop ever and a loss of about $16 billion in market value. Fintech firms Affirm Holdings Inc. and Coinbase Global Inc., which were once high-flying investments, have lost more than half of their value by 2022. The popular FAANG stocks—Facebook parent Meta Platforms, Amazon.com Inc., Apple Inc., Netflix Inc and Google parent Alphabet Inc.—have all been subject to double-digit percentage drop this year, outpacing the S&P 500.
The Strong Dollar is a Curse for Expensive Tech Firms
Weighing on highly valued stocks, increasing rates are causing the dollar value to increase, while adding to concerns about a possible recession. The technology sector has reported some of the sharpest selling among the sectors, with investors looking forward to tighter monetary policy from the Federal Reserve. The tech bear market in part reflects the yield on the 10-year Treasury note, which has risen to 2.9% from below 1.35% in December 2021. Higher rates reduce the present value of expected profits, and for highly valued software companies, most of the earnings are far off in the future.
More Durable than the Dot-Com Era
While there are many parallels to the misery caused by the Dot-Com bubble that burst in 1995, there is little doubt that the tech sector is significantly more established now than it was then. Top tech firms such as Alphabet, Amazon, Apple and Microsoft, to mention a few, are tightening their costing strategies while remaining financially profitable. Many of the services that these tech platforms provide are considered as virtually indispensable by consumers. Despite the scary market movements and alarming daily headlines, the tech industry is anticipated to recover in the long run.
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