Investors are rushing out of US technology stocks in sharp market rotation

Investors dumped shares in many of the technology companies rising during the pandemic as the looming ghost of higher interest rates led them to buy into companies more closely linked to the economic recovery.

The technology-heavy Nasdaq Composite index closed 3.3 percent lower on Wednesday, its worst day since February 2021, while a $ 22-ton sell-off in the US government bond market intensified.

With rising US government debt yields, the attractiveness of many unprofitable companies – including some that had only recently been listed – has been beaten. Their valuations are dependent on potential earnings in the future and therefore sensitive to rising interest rates.

The sharp rotation of technology stocks since the beginning of the year, which has favored stocks in banks and large industrial groups, has also been driven by expectations that the Omicron coronavirus variant will be less disruptive to large global economies than previous strains of the virus.

“Spec-tech is being destroyed,” said Hani Redha, a portfolio manager at PineBridge Investments, referring to unprofitable, “speculative” technology companies with high valuations that are hardest hit.

Year-to-date performance bar chart (%) showing investors selling out of technology while betting on recovery

A closely monitored index collected by Goldman Sachs, which tracks returns from loss-making technology groups, has fallen 9.8 percent this year, after falling 1.4 percent with benchmark S&P 500. Shares in Berkshire Hathaway-backed software maker Snowflake have fallen 12 percent in the first few days of 2022, while the e-commerce groups Etsy and Farfetch have fallen by 14 and 13 per cent respectively.

Pharmaceutical manufacturer Moderna and Covid test processor Quest Diagnostics, which performed well last year, have fallen by 15 percent and 9 percent in 2022, respectively.

In contrast, investors have moved into the shares of automakers Ford and General Motors as well as banks, including Bank of America and Citigroup. The KBW Bank index has risen almost 5 per cent. this year and closes at record highs.

Companies in the travel and leisure industry, among those hardest hit during the pandemic, have also risen, with shares in American Airlines and United Airlines as well as cruise operator Carnival rising higher. A Goldman index of companies closely linked to the reopening of the US economy in 2021 – which includes the mall operator Simon, the hotel group Marriott International and the aircraft manufacturer Boeing – has risen by 2.5 percent this year.

Bar chart of the biggest stock rises and falls so far this year in the Russell 1000 Index (%), showing technology companies among the big laggards in early 2022

The rotation accelerated on Wednesday in the wake of a warning from the Federal Reserve that a faster pace of interest rate rises could be needed to tame inflation.

But even after the U.S. stock market fell sharply, investors maintained recent bets on banks, industrial and energy companies, whose fortunes are closely linked to U.S. economic expansion. All three sectors are up in the year so far.

Given the fluctuations early in the year, bankers and investors warned that they were preparing for an uneven ride during the first quarter. Many are directly focused on the Fed, which is withdrawing support from the pandemic era that helped lift the stock market.

The sharp rise in bond yields in recent days has encouraged investors, with David Lebovitz, JPMorgan Asset Management strategist, saying it had “destabilized” growth and technology stocks. Interest rates on the 10-year Treasury have risen 0.19 percentage points so far in 2022, among the largest three-day gains recorded over the past year, according to Financial Times calculations.

“We’re not going for high-flyers,” Lebovitz added. “We go after the companies that can generate earnings.”

The potential for further coronavirus mutations may also limit enthusiasm for stocks linked to the health of the economic recovery.

“Let’s face it, there’s still a significant amount of uncertainty out there… The possibility of a new variant could be very problematic,” said Kristina Hooper, head of global marketing strategist at Invesco. themselves create higher volatility. “

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