Burning Man has once again graced Silicon Valley. But this time, the biggest tech companies aren’t celebrating.
The tech-heavy Nasdaq Composite tumbled last week, dampening high hopes among investors that the sector will now return to its original activity after its worst first half in decades.
The Nasdaq posted a strong return last month that continued into August. The index is headed for a new bull market with its longest winning streak since November.
The high level came after some positive inflation data released earlier this month reassured investors and calmed the stock market. CPI rose 8.5% year-over-year in July, less than the 9.1% in June. This has heightened hopeful sentiment among investors that the Federal Reserve will not raise interest rates further.
And now it appears that the central bank is not in line with investor expectations.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Fed Chair Jerome Powell stated during the central bank’s annual Jackson Hole symposium on Friday.
The market fell after the comments. The Dow was down more than 1,000 points (3%) and the Nasdaq plunged 3.9%.
The technology sector performs forward-looking and is directly affected by changes in interest rates and inflation. As interest rates fall, riskier investments tend to drive up valuations of attractive tech companies, making them more expensive. Conversely, it is difficult to attract investors when interest rates are rising.
Read also: Fed Chair Jerome Powell Cautions Combating Inflation will Result in ‘Some Pain’
Tech Firms are Concerned
Despite its recent comeback to bull levels, the Nasdaq has dropped around 23% year-to-date, and there are concerns that the more prolonged effect could negatively impact business.
Enterprise tech spending is beginning to collapse, and consumer-oriented hardware products are experiencing sales and prices enfeeble.
Furthermore, tech firms are beginning to lay off employees. Around 40,000 employees in the US tech sector have been cut in mass job redundancies thus far in 2022.
Firms dependent on consumer spending and ad revenue – including Amazon, Facebook, and Twitter – may be in a problem. However, it’s not all negative news, per Sameer Samana, senior global market strategist with the Wells Fargo Investment Institute.
He believes firms like Cisco and Microsoft that handle software, hardware, and semiconductors are worth purchasing.
“It’s a secular theme for us,” he stated. “Development in automation and the internet of things give these companies a long shelf life.”
The complicated part is that the “discretionary earnings shoe has yet to drop for tech,” he stated. As a result, consumers could withdraw spending as inflation continues to hit.
Read also: Stocks Tumble with Growing Concerns on Huge Fed Rate Hike