The tech-heavy Nasdaq 100 fell 0.3 percent on Thursday, extending its decline this year to 27 percent.
Mega-cap growth and technology stocks are selling at the fastest pace since the dot-com bust in 2000 compared to cheaper companies like banks and energy companies that pay higher dividends.
Investors are cooling off on stocks whose earnings prospects lie far in the future, a future made even more uncertain after prices rose more than expected in April, keeping inflation near a 40-year high. years. Add in a more aggressive policy response by the Federal Reserve and a potential recession and all the ingredients for a deeper tech crisis are lining up.
“This CPI print was perhaps the most anticipated in recent history, particularly for growth investors with long duration names that make up the bulk of their portfolios,” said Lewis Grant, senior portfolio manager at Federated Hermes in London. “It would not have been good news.”
Thursday’s data also showed producer prices rose faster than expected, adding further pressure on US authorities to raise rates. That is fueling speculation that the Fed will resort to a three-quarter point move to follow last week’s 50 basis point increase, the biggest in two decades.
For growth stocks like Apple Inc., Alphabet Inc., which owns Google, and Amazon.com Inc., that means a bigger discount to their earnings power. The tech-heavy Nasdaq 100 fell 0.3% on Thursday, extending its drop this year to 27%.
“The main vulnerabilities for growth stocks stem from the destruction of excess liquidity globally and the associated higher discount rates,” said Peter Chatwell, head of global macro strategies trading at Mizuho International Plc. “Now that monetary tightening is in full force, this should be just the beginning of the macro trend.”
Nearly half of Nasdaq constituents are down at least 50% from moving highs, according to JPMorgan Chase & Co. Baskets that track unprofitable technology companies and highly valued software companies have lost all of their gains from the era of the pandemic.
What’s more, growth stocks are likely to remain under pressure amid the prospect of a more aggressive Fed, according to strategists at Citigroup Inc. They reiterated their preference for lower value stocks.
Growth stocks remain expensive, especially compared to cyclical value stocks. The MSCI World Growth Index is currently trading at 22 times future earnings versus 12 times its value counterparts. The gap between the two famous investment styles is double the 25-year average.
Those expectations of future earnings put growth stocks squarely in the path of inflation that erodes future earnings. Just look at Tesla Inc., which is trading at 55x 12-month forward earnings, a far cry from the S&P, which is trading at 16.6x.
That vision of earnings growth seems increasingly clouded by economic reality.
“Mega-cap growth has fallen out of favor due to slowing earnings growth and the likelihood that economic conditions will not be as favorable for them relative to the rest of the market as they were during the height of the pandemic. said Ed Clissold, the chief US strategist at Ned Davis Research. “The continuation of the tightening cycle should spell more pain for growth.”