Inflation And Rate Hikes Hurt High-Growth And Low-Profit Tech Companies The Most: Here’s Why

Inflation And Rate Hikes Hurt High-Growth And Low-Profit Tech Companies The Most: Here’s Why

rate hikes

Trader Thomas Lee works on the floor of the New York Stock Exchange, Dec. 9, 2021. (AP Photo/Richard Drew)

Investors expect the Federal Reserve to fight inflation by raising interest rates as many as four times in 2022. Rising interest rates — and the resulting higher bond yields – hurt tech stocks.

That’s because many technology companies are unprofitable or barely profitable, Harry Robertson wrote for Business Insider. “If bond yields are higher, then investors are losing out on returns in the here and now by holding tech companies that will only start earning properly in the distant future. That makes those firms look a lot less appealing.”

U.S. stocks fell Monday morning, continuing a rough start to 2022 for equity markets in the face of interest rate hikes.

The S&P 500 was down 1.8 percent, the Nasdaq Composite fell 2.4% after four straight days of losses. The Dow Jones Industrial Average dropped 1.4 percent. The benchmark 10-year Treasury yield, which ended 2021 near 1.51 percent, was above 1.8 percent on Monday morning. Large tech stocks tanked in early trading, with shares of Alphabet and Amazon down 2 percent and Facebook-parent Meta down 3 percent.

“A more hawkish tune from the Federal Reserve is top among drivers for the tech rout, as Wednesday’s release of the December FOMC meeting minutes showed an increasing tilt toward interest rate hikes faster than previously thought to fight inflation,” Dan Mika wrote for ETF.com. “Tech and growth stocks generally suffer in rising-rate environments as tighter monetary policy can lower growth expectations.”

Prospects of aggressive Fed tightening “are most negative for high-growth/high-PE names,” said Tom Essaye of the Sevens Report in a note on Monday to clients, CNBC reported.

High valued, fast-growing electric-vehicle shares were especially hard hit while stocks of traditional auto companies did better. Tesla stock was down 14 percent the first week of January, Rivian Automotive shares were down 19 percent, and stock in Chinese EV maker NIO was down 13 percent.

By comparison, shares in Ford and General Motors were up by about 11 percent and 1 percent, Barrons reported.

“Fears of rising interest rates are bad news for companies whose earnings are expected to grow rapidly in the future. The recent trading is a brutal reminder that part of the return of any stock — even Tesla —isn’t determined by a company’s individual fundamentals. Investing math matters,” Al Root wrote for Barrons.

Growth stocks are companies that are considered to have the potential to outperform the overall market in the future. Value stocks are companies that are currently trading below what they are really worth and will thus provide a superior return, according to Investopedia.

The three largest funds in tech-focused ARK Invest ETFs, led by Cathie Wood, all lost more than 10 percent in the first week of 2022, including the flagship ARK Innovation ETF (ARKK), the ARK Fintech Innovation ETF (ARKF) and the ARK Genomic Revolution ETF (ARKG).

Tech became a safe haven at the start of the coronavirus outbreak and the pressure to sell is expected to settle down after the Fed’s first rate hike, according to Ed Moya, a senior market analyst at OANDA. Markets are rushing to price in rate hikes in 2022 and that may be good news for cyclical stocks in the short term. However, he said he believes tech names will rotate back to safe-haven status in 2023 and beyond despite not having record-breaking growth, ETF.com reported.

“When people become very concerned, and when we’re talking about the 10-year at 2 percent, people will be going back to tech, believe it or not,” he said.

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Photo: Traders Thomas Lee, center, works on the floor of the New York Stock Exchange, Dec. 9, 2021. (AP Photo/Richard Drew)