A year after the Nasdaq tech index reached an all-time high, we look at what’s happened since and what might be in store next year.
The portfolios of tech investors looked very different a year ago this week as the soaring valuations of Apple, Microsoft and others helped the Nasdaq Composite to a record high.
A strong earnings season had just boosted hopes that US inflation and supply chain issues were under control, with Wall Street braced for possibly three rate rises in 2022.
In the end, they got far more than expected as surging prices caused by the Ukraine war forced the Federal Reserve into one of the fastest monetary policy tightening periods on record.
As interest rate expectations and bond yields surged, technology and other growth stocks became less attractive to investors due to the diminishing value of future cash flows.
In addition, the impact of rate rises in a slowing US economy fuelled earnings fears that culminated in this month’s round of planned jobs cuts at tech giants including Facebook owner Meta Platforms and Amazon.com.
On 22 November 2021, however, the Nasdaq Composite stood at an all-time high of 16,212, driven by the support of pandemic-era monetary stimulus as investors found no better alternative for their money at a time of low interest rates. It was also the month that cryptocurrency bitcoin hit a record high above $68,000.
Beneficiaries included Apple and Microsoft as Wall Street’s largest two companies added $681 billion (£576 billion) and $847 billion (£717 billion) of market value during 2021.
The Nasdaq surged by 7% in October 2021 as reassuring third quarter earnings rolled in, but warning signs began to flash in November when Federal Reserve chair Jerome Powell retired the word “transitory” to describe inflation. There was also a “hawkish pivot” by the Fed when it began tapering its asset purchase programme by $15 billion (£12.7 billion) a month.
Inflation readings for November showed the consumer price index and personal consumption expenditure rising at their fastest pace in 40 years at 6.8% and 5.7% respectively.
The emergence of the Omicron variant added to the uncertainty, setting in motion a downturn that would eventually leave the Nasdaq Composite more than a third lower by the time it reached its low of 10,088 on 13 October this year.
Big fallers in the year since Nasdaq hit its record high last year included electric vehicles giant Tesla and streaming business Netflix, with both trading more than 50% lower. Meta Platforms lost two thirds of its value and Amazon.com weakened 46%.
After more than a decade of expanding valuations, it’s worth remembering that the Nasdaq Composite is still up more than 60% across five years. A recent recovery, triggered by hopes that the Fed may be near the interest rate peak, means the Nasdaq closed last night at 11,183.
UBS pointed out last month that the tech sector’s price-to-earnings ratio had declined by 34% from 29 times to 19 times, more than the deterioration of 26% for the S&P 500 index.
Even though IT shares are “cheaper” versus 2020 and 2021, the bank said they are not yet in “cheap” territory as the sector traded at a 21% premium to the broader market.
UBS believes that earnings estimates for tech are still too high given elevated US inflation, declining corporate confidence and a tightening of financial conditions.
The comments by its global wealth management team came in the wake of a largely disappointing earnings season in which shares in Meta fell 24% due to declining revenues and weaker forward guidance.
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Google owner Alphabet also declined 9% after missing both revenue and earnings estimates and as it pledged to focus on costs. Microsoft beat forecasts for both revenue and net income, but shares fell 8% due to lower growth forecasts for its cloud platform.
What's in store for 2023?
Consensus estimates for IT sector 2023 earnings have fallen 8% from their peak, but the majority of this reduction relates to semiconductor firms.
UBS warns of increased headwinds for software and services and points out that the IT sector is the most global of all S&P 500 sectors, with more than 58% of revenue coming from outside the US compared with 40% for the S&P 500.
While the US dollar index is down from its peak at the end of September, it is still well ahead in the year-to-date amid expectations for further dollar strength in 2023.
UBS said: “This will almost certainly be another headwind for forward sector estimates. Tech is also most vulnerable to rising interest rates, since this reduces the present value of more distant profits that are discounted at higher rates.”
There are also doubts about whether technology is really a defensive sector, as some on Wall Street have called it after earnings growth during the Covid economic downturn.
Bank of America is not convinced: “Since the '80s, tech has been just as cyclical as the S&P 500 based on the frequency of sales declines but has been buoyed by cost benefits from globalisation and (more recently) a pull forward in demand.
“But mega cap tech companies are not immune from economic downturns and are facing the biggest challenges amid de-globalisation.”
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