If Technology is booming, why have Tech Stocks fallen off a cliff?

Victoria Scholar, Head of Investment at interactive investor navigates the current difficulties the tech sector is facing…

Since late last year, we have noticed that something has certainly changed in the industry. Companies have been facing serious difficulties and reporting disappointing results for their investors, and we’re talking about the biggest names in tech; Microsoft, Meta, and Amazon. As a result heads are starting to roll. 

Sundar Pichai, Google’s CEO, said in an email sent to the company’s staff that the firm will lay off 12,000 employees from today, Friday 20 January. On Wednesday 18 January Microsoft announced it will be letting go of 10,000 employees. Amazon began  a fresh wave of job cuts this week which will see them lose 18,000 employees. Back in November Meta announced it was eliminating 13% of its workforce, resulting in the loss of 11,000 employees. Expert estimates say that these companies and other tech firms have laid off a combined 70,000 employees in the last year. Scary stuff… So why is this happening? 

“2023 looks set to be a bumpy ride for technology” explains Victoria Scholar, Head of Investment at ‘interactive investor’ (ii), the UK’s leading flat-fee investment platform. She is a well-known commentator in the financial press and analyses financial markets and shares her views on a range of finance, and business topics. She is passionate about attracting more women to the financial services industry, so we asked her to give us a little history lesson on tech stocks, and some insight on what got us to this point. 

The successful history of Tech Stocks: 

“Technology has been a favourite sector among investors who have largely enjoyed stellar long-term returns on companies such as Apple, Amazon, Alphabet and Netflix,” explains Victoria, “Since the global financial crisis in 2008, interest rates have been extremely low, with the wash of cheap money allowing business to borrow at rock bottom rates. This helped companies to take on debt with very low repayment charges, fuelling a golden era for equity markets. The Nasdaq 100, which is an index of US listed companies with a heavy weighting towards technology including names such as Tesla, Microsoft and Apple enjoyed a meteoric rally of more than 1,300% from the 2009 lows until the peak in 2021.”

Tech Stocks during the pandemic: 

“The pandemic provided a major tailwind to technology stocks. Most of us were forced to lockdowns to offset the public health crisis, prompting major changes in consumer behaviour,” says Victoria, “Isolation rules meant we were even more glued to our technological devices than ever. Working from home brought about a boom for online meetings, catalysing supercharged demand for Zoom and similar technologies, while extra free time meant more binge watching on Netflix, and restrictions on visiting friends and family lead to more screen time and social media with a TikTok, Instagram and Whatsapp explosion. Even workouts shifted online with a surge in sales of Peloton bikes and e-commerce companies like Asos and food delivery businesses like Deliveroo thrived while high street retailers, bars and restaurants were out of reach.”

“Plus, with many sporting events cancelled, those with a penchant for betting or trading looked towards apps like Robinhood and Coinbase as a way to punt on stock markets and cryptocurrencies instead with bitcoin, ether and others flourishing. Investors capitalised on this shift, buying up technology stocks, resulting in swift gains across the sector.” 

Why are Tech Stocks falling? 

According to Victoria, “Everything changed in late 2021 and early 2022 leaving many investors caught off guard. As lockdowns and other government restrictions were removed, our dependence on technology faded.”

“The economic reopening post-pandemic and the resumption of normal living brought about a major U-turn for technology stocks. The easing of Covid restrictions unleashed our pent-up demand for goods and services; many of us excitedly rushed back to physical shops, eateries, gym classes and airports for international travel, to the detriment of technology.”

The effect of Inflation

“On top of that, post-Covid, there was a major revival of inflation, driven not just by surging demand but also by problems with our global supply chains. During the pandemic, most supply chains were either out of use or operating sharply below capacity. Supply chains struggled to get up to speed to keep pace with the massive revival in demand from consumers, causing major problems for businesses in terms of bringing their products back to market. The huge imbalance between sky-high demand and subdued supply meant prices shot up, leading to a revival in inflation across many economies,” explains Wictoria.

How does the Ukraine war affect tech stocks?

“The Ukraine war which started in February 2022 added to those inflationary woes by pushing up prices of oil, gas, and food as Russia and Ukraine are key commodity exporters to the world. Central banks such as the Bank of England in the UK and the Federal Reserve in the US which control interest rates, the main policy tool used to counter inflation, scrambled to quickly raise rates in an attempt to curtail spiralling price pressures. The punchbowl of cheap money was suddenly removed, on which long-term growth in the tech sector was predicated, pressurising stocks in the sector,” says Victoria, “Tesla for example has shed more than 60% of its stock market value over a one-year period and Facebook’s parent company Meta has suffered a similar slump. As the global economy cools, post-pandemic demand fades, global supply chains normalise and economies reduce their dependence on Russian oil and gas, inflation is starting to moderate. But Fed* and other monetary policymakers say we are not out of the woods yet, with further interest hikes still on the horizon.”

*The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America.

What will happen to Tech Stocks in 2023?

“2023 looks set to be a bumpy ride for technology, particularly given the backdrop of slowing global economic growth,” says Victoria “but arguably the end of the tunnel could be in sight.”