2020 saw the meteoric rise of many technology stocks, with some registering more than 100% surge in their valuations. But why are tech stocks dropping recently?
Recently we observe that this momentum in the tech stocks seems to have faded away. The once lofty expectations of high growth and profits seem to have transformed into fear and selloff instead.
Beloved companies like Tesla have seen its share drop by 15% since the beginning of the year. On the other hand, Apple’s share seems to be stunted as well. This is despite the company announcing record sales in the quarter that ended in March 2021.
Here are 3 key reasons why we think the market is behaving this way.
1. Inflation and Potential Interest Rate Hikes: Why are tech stocks dropping
Source: BBC / Stock markets slide on fears of rising inflation
Till now, you must have read or heard about the growing concern of inflation going on in the economy.
This is something that investors fear and don’t want to hear. Because, if inflation exceeds Fed’s target of 2% substantially, it increases the probability of the Fed lifting interest rates in 2022 in order to bring down inflation.
Higher rates is definitely a concern for tech investors as it translates to higher cost of doing business.
Another part of this equation will be that analysts will be lowering valuation of these companies with higher discount rates.
All in all, growing concern of inflation has largely kept the bullish sentiment off the market for the time being.
2. Rising Taxes: Why are tech stocks dropping
Source: Bloomberg / Biden Eyeing Tax Rate as High as 43.4% in Next Economic Package
Just a quick background, U.S President Joe Biden is proposing to raise the corporate tax rate. The plan is to increase the tax rate from 21% enacted during Trump’s time, to a higher 28%.
According to Goldman Sachs chief U.S equity strategist, David Kostin, if the Biden corporate tax plan were fully enacted, the big tech companies FAAMG (Facebook, Apple, Amazon, Microsoft and Google) will see their estimated earnings reduced by about 9% relative to consensus expectations.
It will definitely hurt the earnings of companies if a higher corporate tax rate is realized. Consequently, it will impact the returns to shareholders, hence valuations, negatively as well.
Not only that, President Biden is also proposing to increase capital gains tax on the wealthiest Americans. The plan is to raise it from the current top rate of 23.8% to a potential 43.4%.
Imagine if this new capital gains tax policy will affect you directly. You would probably want to cash out some of your profits first at the current lower tax rate. Rather than waiting till the next year and potentially subject to a much higher capital gains tax.
Therefore, investors’ concerns about the potential rising corporate and capital gains tax are definitely why the bullish sentiment has been tapered off currently.
3. Technical Break Down On Charts: Why are tech stocks dropping
Source: MarketWatch / Nasdaq 100 Index
Well, I’m not into technical analysis per se. But I understand that many investors and traders, including big institutions, are relying on the charts for entering and exiting their positions. Hence, any swing in the technical indicators will move the market considerably.
From what I understand, the Nasdaq has bounced off its own 100-day moving average four times since September last year. And currently it is closing on this moving average again.
If it breaks below that line substantially, then it may potentially cause greater correction. The bear will take the place of the bull, and result in market selloff.
This will affect the direction that momentum traders will take. And move the stocks of these companies in the way of the force further.
To summarize, the ongoing concerns of inflation and associated interest rate hikes will potentially place tech companies at lower valuations.
Biden administration seeking to raise corporate and capital gains tax has definitely exacerbated the situation.
Finally, major trendlines are in the area of uncertainty at the moment. Any substantial movement break down on the chart will move the market to the bear’s territory.
So, all these will not only cause fear but also valid concerns that are halting the strong momentum of tech companies we saw in 2020, which is also why are tech stocks dropping.
Let me know your thoughts on this, and share with us in the comment below. And remember to subscribe to our newsletter below, so that you can be informed once our next investing tip is out.
In the meantime, check out other insights and analyses that we have done. Continue learning so that you make better investment decisions.
Keep learning and happy investing. And we will see you soon!