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Why Did Tech Stocks Get Hit Hard

Technology stocks are often characterized by high growth potential, strong fundamentals, attractive valuations and less expense relative to their non-technology stock peers. For the better part of the last decade tech stocks outperformed the broader market, making them one of the most attractive sectors for investors. That changed in 2022. A forty-year inflation high, rising interest rates, and a strong US dollar overseas knocked the wind out of mega caps like Meta, Netflix, Apple causing them to sink.  Why are tech stocks sensitive to these disturbances?

When interest rates rise, stocks with high price-earnings ratios and fast growing companies like technology stocks tend to fall quicker than stocks with lower price-earnings ratios because investors become less willing to pay a higher price for stocks future growth when returns on bonds are higher. Investors are also more likely to favor bonds over stocks when rates rise, causing stock prices to drop. The hope of fast future growth gets discounted quickly when there are less risky alternatives available coupled with anticipated economic slowing usually impacts and creates uncertainty for the faster growing companies causing investors to want to take less risk. 

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Erik Weir