Shares of the largest US technology firms have fallen out of favor in the most pronounced way since the 2000 tech bubble, victims of a shift in investors’ tastes inspired by rising interest rates.
For years, portfolio managers were willing to overlook the occasional blemish in the tech giants’ quarterly results, reasoning that there were few alternatives at a time of generally slow economic expansion. That sort of patience has evaporated this year, as investors in Meta in particular can attest following last week’s earnings-driven rout.
“There was rampant speculation in the sector,” said Rupal Bhansali, chief investment officer and portfolio manager of global equity strategies at Ariel Investments. With rising rates, “people come back to their senses and realize we need to be more circumspect.”
The Nasdaq index’s value has dropped this year by some $8 trillion. That compares with around $5 trillion over three years in the 2000-2002 rout, a sum that would be worth about $8.6 trillion today. Technology shares have led the 2022 market decline, unlike the 2007-2009 downtown when the worst selling was in financials and housing-related shares.
In the years after the financial crisis, tech stocks seemed to only go up, notching nearly a decade of mammoth returns that drew in even more buyers. During the pandemic bust and boom in 2020 and 2021, the companies appeared immune to economic distress while fully enjoying the benefits of reopening.
That all changed this year, with the Federal Reserve’s determination to break inflation. Rising rates have left tech executives and investors navigating a starkly different market environment, one that favors investments that generate cash for the holder now.
Companies including Apple, Amazon, Meta, Microsoft Corp.
and Tesla Inc.
have figured most in the S&P 500’s roughly 19% fall through Thursday, according to S&P Dow Jones Indices, while shares of energy firms have risen. Meta is trading at levels not seen since 2016.
Wall Street expects more damage ahead. Analysts’ estimates for fourth-quarter earnings from firms in the S&P 500’s communication-services sector—home to the parents of Facebook and Google—have fallen more than for any group since the end of June, according to FactSet. Stocks in the sector are on pace for their worst year in more than two decades.
At the start of the year, Meta was one of the 10 biggest companies in the S&P 500. Today, it isn’t even in the top 20, with companies such as Chevron Corp. and Bank of America Corp. overtaking it.
“What do you pay for a growth stock that’s not growing the same way any more?” said Ron Saba, a senior portfolio manager at Horizon Investments.
mr. Saba said his firm is focusing on so-called value stocks, those deemed by investors to be trading below a measure of their net worth, and shares of economically sensitive companies such as manufacturing firms. He is particularly bullish on industrials, utilities and energy stocks, the types of companies that helped push the Dow Jones Industrial Average 5.7% higher over the past week, outpacing the S&P 500.
In addition to navigating rising rates and high valuations, tech executives have been grappling with a soaring US dollar, consumers whose spending power is pinched by inflation and the possibility of an economic slowdown. Intel Corp.
this past week announced plans to trim costs by $3 billion next year.
Mrs. Bhansali of Ariel Investments said many companies in the technology sector took their cues from investors and overspent in recent years. She thinks they will now have to adjust and still doesn’t think it is a good time to invest in stocks such as Meta and Alphabet because they will likely be hurt by declining advertising revenue.
Mark Zuckerberg spoke about a new Meta virtual-reality headset during a New York event this month.
Photos:
Michael Nagle/Bloomberg News
Some tech heavyweights still appear expensive despite this year’s sharp pullback, analysts said. Amazon shares are trading with a price/earnings ratio of roughly 65 times projected earnings over the next 12 months, according to FactSet. The S&P 500 trades at around 16 times projected earnings.
Right now, Ms. Bhansali favors companies that offer steady payouts to investors through dividends as well as those with recurring revenue through subscription services. She is also looking at telecom companies, with the thinking that consumers likely won’t stop paying their mobile-phone bills during a recession.
Some companies’ spending is facing increased scrutiny. After Meta forecast capital spending of more than $30 billion, primarily for artificial-intelligence investments, analysts on the company’s earnings call pressed executives on how the expenses would pay off.
Meta Platforms Chief Executive Mark Zuckerberg expressed confidence that his initiatives would reward shareholders who showed patience. The next day, Meta’s stock dropped 25%.
To be sure, not all quarterly results have been a disaster. Apple reported record revenue in its September quarter, and its shares rallied 7.6%.
Others are hanging on. David Jeffress, a portfolio manager at Laffer Tengler Investments, said his firm did not trim its Microsoft stake even after the company reported its weakest revenue growth in over five years. He sees underappreciated opportunities in subscription-based revenue segments such as Microsoft Teams, LinkedIn and gaming.
“Selling at this point would be giving the stock away,” said Mr. Jeffress.
But plenty of investors aren’t showing the same sort of resolve. Snap Inc.
shares fell 28% in a day this month after the company posted its weakest sales performance since going public, leaving the stock down 79% for 2022.
Earlier this year, executives decided to discontinue a flying selfie camera known as the Pixy just months after unveiling it. Asked about the decision at The Wall Street Journal’s Tech Live conference this past week, Chief Executive Evan Spiegel responded that “it is a fabulous and low-margin product in a world of 5% rates.”
Write to Gunjan Banerji at [email protected] and Hannah Miao at [email protected]
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