What’s the outlook ahead for tech stocks?
This is a time marked by aggressive interest rate hikes, as the Federal Reserve looks to tamp down surging inflation.
The valuation of a company is based on the present value of its future earnings. This means that rising interest rates make growth stocks less attractive in the short run, as the present value of the company’s cash flow from its future earnings is worth less than before due to the higher borrowing costs today.
This period is also marked by risks of a business slowdown, which hurt earnings that anchor how stock prices are valued. In November 2022, we saw headlines dominated by layoffs in the tech sector as earnings slowed. Twitter’s new leader, Elon Musk, slashed headcount by a brutal 50%. Meta — which owns Facebook, Instagram, and WhatsApp — has cut 13% of its staff.
Equity markets have declined 21.1% this year, but the technology sector had a much tougher ride...