Once the stars of Wall Street, Big Tech returns to Earth 2022-04-28 10:10:20

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NEW YORK (Associated Press) — After years of screaming upwards, almost no matter what the economy was doing, tech-oriented stocks are plummeting and ricocheting into what’s left of Wall Street.

Many of these notable companies still generate billions of dollars in profits, and they continue to dominate the top of the ratings of the most valuable companies. But two big changes have caused its shares to fall sharply back to Earth this year: Interest rates are rising, and expectations for their continued significant growth are suddenly looking bleaker.

Take Netflix, for example, whose stock more than tripled between early 2018 and its peak last November. It has since lost nearly all of that gain, dropping by more than two-thirds this year alone for the S&P 500’s worst loss as of Tuesday.

Likewise, Facebook’s Meta Platforms have lost nearly half of their value this year. Neither company entered Wall Street’s “tech” rating; They are instead categorized as “communication services” companies, along with many other Internet related stocks.

But both are a large part of the Nasdaq Composite Index, along with heavyweight tech companies like Apple and Microsoft. And the Nasdaq is fast-paced toward its worst month since the 2008 financial crisis. Its 20.2% drop for the year, as of Tuesday, was much worse than the 12.4% drop for the S&P 500 or the 8.5% drop for the Dow Jones Industrial Average, which isn’t focused on technology.

Shares of technology companies in the S&P 500 are down 19.8% in the year through Tuesday, while telecom services shares in the index have fallen further, down 24.1%. The rest of the S&P 500 fell only 6.9%.

Technology-oriented stocks have largely struggled because interest rates have jumped to their highest level in years. For example, the 10-year Treasury yield recently crossed 2.90% after starting the year at 1.51%, although it has eased in recent days. Yields soared as the Federal Reserve prepares to raise short-term interest rates sharply to stem high inflation. It is also planning other moves to push long-term interest rates higher.

High interest rates put a strain on all types of investments. Now that the 10-year Treasury is close to offering a real yield for the first time since the pandemic, after inflation is factored in, investors can make money by standing in safe bonds. This makes them less willing to pay high prices for riskier investments. High-growth, tech-oriented stocks are now taking the hardest hit because their prices have earlier soared to all-time highs.

Netflix, for example, started 2022 with a stock price trading 45.6 times its expected earnings per share over the next 12 months. That was more than double what investors were willing to pay for every $1 of the expected earnings from the total S&P 500.

Investors were comfortable paying such high prices for Netflix and tech stocks in general when interest rates were so low. They were also willing to expand into stocks of companies that were able to grow aggressively, even when the overall economy was hurting.

But rates are now rising and continued growth seems less certain. Netflix recently reported a drop in subscribers in the first three months of the year, for example, with more losses expected in the spring. People have more options for entertainment now that the pandemic restrictions have been relaxed.

Alphabet, Google’s parent company, said Tuesday that its revenue growth in the fourth quarter slowed to its lowest pace since 2020. Analysts highlighted the slowdown in search, and in YouTube in particular.

Semiconductor stocks have also lagged significantly this year, in part due to concerns that demand for smartphones, PCs and other devices will take a toll after sales explode during the pandemic. The semiconductor stock index is down 26.3% this year, a sharp decline after jumping more than 40% for three consecutive years.

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