The great bull run for tech stocks may finally be over.
It’s been a brutal year for big companies in Silicon Valley. Apple’s (AAPL) stock is down about 16% in 2022, making it the “best” performance of Big Tech’s so-called FAANGs. Facebook owner Meta, Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL) have all done much worse, with Meta plunging 66% this year.
Other Nasdaq titans, like Microsoft (MSFT), chip giant Nvidia (NVDA) and Elon Musk’s Tesla (TSLA) also fell between 25% and 45% in 2022. (The Nasdaq itself is down nearly 30%.)
The technology sector has been a market leader for years, but there are growing concerns about the future. Recent earnings have not been great.
Liz Young, head of investment strategy at SoFi, noted in a report late last week that third-quarter tech earnings fell 1% from a year ago and that revisions for the fourth quarter had been reduced by nearly 10% in recent weeks. It could get worse.
“As this is the first quarter of a significant tonal shift in earnings…I don’t expect this to be the last of margin pressure,” Young wrote. She added that “it is becoming clear that we can at least see recessionary conditions in some sectors, even if they do not affect all facets of the economy. Technology is one such sector.
There are also legitimate questions about strategy changes in some companies. Meta, for example, is banking on augmented and virtual reality while Netflix is now embracing advertising after years of swearing there would be no ads on its platforms.
Wider concerns about the economy and advertising spending are hurting the sector. Many tech giants have already announced layoffs, and there’s speculation there could be more job cuts to come.
Recession worries don’t bode well for consumer spending, which is bad for Amazon and Apple in particular. And the tech leaders all face stiffer competition – in some cases from each other – but also from rivals around the world.
With that in mind, this could just be the start of a tech bear market.
Todd Sohn, director and technical strategist at Strategas, noted in a report late last week that when tech stocks imploded in 2000 when the dotcom bubble burst, it wasn’t until after the 2008 financial crisis. that technology has resumed its market role. chief.
Sohn said the tech could be in for another long winter ahead, noting that it’s “reasonable to expect that the tech could pull back over the next couple of years, while energy, industrialists, etc. are taking on the same kind of leadership role they took on after the tech bubble.
Still, some say the tech will rebound in 2023. But investors may need to look beyond FAANG, Microsoft, Nvidia, Tesla and other megacaps.
“Technology is not a monolith. We believe that cybersecurity and robotics have the potential to turn the economic cycle around, given that cybersecurity has moved from a niche to a necessity and that robots are essential to combat supply chain challenges, labor shortages and inflation,” Jay Jacobs, US head of thematic ETFs and active stocks, said in a report.
BlackRock (BLK), owner of the popular iShares family of ETFs, recommends several of its own sector funds as a way to play on these trends, including iShares Cybersecurity and Tech (IHAK), iShares Robotics and Artificial Intelligence (IRBO), BlackRock ( BLK) Future Tech, iShares Evolved US Technolog (IETC)y and iShares Semiconductor ETFs.
Shawn Cruz, chief business strategist at TD Ameritrade, owned by Charles Schwab (SCHW), said tech investors are turning more to cybersecurity because it’s a must for businesses regardless of economic conditions. given the high-profile hacking incidents.
Cruz said some parts of the tech are trading at more “frothy” valuations. But cybersecurity stocks such as Palo Alto Networks (PANW), as well as semiconductors, are more reasonable.
In other words, tech investors should be looking for duller parts of the industry, not assets like crypto that are more about hype than substance. Cruz said the technology winners won’t be the ones with the next big idea or application. It’s about providing a service that businesses will need even if the economy slips into a recession.
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