In recent days, tech investors have begun to see quite a bit of red. The question of why tech stocks are down is one that’s becoming more pervasive of late.
Why all the red?
Well, there’s some indication that valuations have become stretched beyond the historical norm. A significant amount of speculative fervor, combined with high margin utilization and a wave of new investors has fed this frenzy on Wall Street.
The degree to which investors are taking their winnings and running home remains to be seen. However, with interest rates where they are today, it’s perhaps unsurprising that capital continues to have no place to go other than equity markets right now. Thus, we have the conundrum investors find themselves in today.
Let’s dive into a few factors that are playing into the tech selloff we’re seeing today.
Why Are Tech Stocks Down Today?
Heavy selling in high-growth areas of the market has driven many high-profile tech stocks down in recent days. There’s growing concern that U.S. 10-year treasury yields will continue to creep higher, amid stronger inflation expectations. This “good news is bad news” reality is one which is not bullish for high-growth stocks that have seen their valuations swell amid record-low interest rates of late.
That said, there’s been glimmers of hope that interest rates could remain lower for longer. Rather lackluster jobs data confirming a less-than-perfect recovery trajectory can be a good thing for those concerned about rates rising faster than the market expects over the near term.
Aside from interest rates, it appears market expectations are setting the bar at ridiculously high levels. A number of tech companies that reported blowout earnings saw their stock prices decline in recent weeks. This earnings season was one which, on the whole, saw massive beats nearly across the board. However, the market seemed to be pricing in even larger beats, and more bullish forward guidance.
Palantir is a stock that’s already moving, prior to its earnings announcement tomorrow. Indeed, the market appears to be pricing in underwhelming earnings before they happen. And underwhelming needs to be kept in context — these companies have been blowing away Wall Street expectations of late.
Today, it appears stocks are priced to perfection. Any sort of inkling of slowing growth, or less-than-perfect performance is enough to tip the scales to the downside. Accordingly, investors appear to be in cautious mode right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.