Two months later, 2022 is already a very negative year for stock market investors. The technology sector has such a significant influence on global stock markets that the shift should not be overlooked, as technology stocks are leading the way in general markets. As of February 16, the MSCI All-Country World Index yielded a -4.5% year-over-year loss, particularly weakened by the 9.4% plunge in the financial sector. A reckless assessment of this sector’s profitability might lead one to believe that the golden age of technology has gone out of fashion. But we are not convinced that this is the case. This why tech stocks drive market volatility so important to analyze.
On the contrary, we believe that adjustments in perception and the adjustment of stock markets to a phase of higher interest rates have caused the recent volatility. In fact, when we look at the corporate pillars which should drive stock gains by healthy margins over the long term we believe the odds for most of the sector have improved in recent months. It’s no coincidence that the technology sector has led the markets in recent years.
What’s driving the dynamics in the tech sector?
With the focus on growth following the outbreak of mixed US-China trade tensions and then the COVID-19 pandemic, investors chased growth wherever they could find it, and, as nauseating events (electricity availability) hit, secular growth trends supported by leading double-digit products and services began to take center stage. Many of them accelerated during the crisis, as businesses and households increasingly turned to digital solutions to get out of bad situations.
Last night, a resumption of economic activity, coupled with supply chain constraints, heralded a rise in inflation and, with it, a political reaction from central banks. At the end of 2021, futures markets were forecasting three rate hikes of 25 basis points each by the US Federal Reserve in 2022. Due to persistent inflation, market expectations are now for increases of six and more. This is significant because rate sales directly influence the discount rates used to price riskier assets. And the effect of a larger discount is more pronounced in long-term assets, such as secular growth stocks, than the price of those derived primarily from future cash flows.
What are the hidden opportunities?
That is exactly what happened in 2022. The price-earnings ratio of the global technology sector has contracted 13% year-on-year through February 15. Few doubt that loose monetary policy has contributed to the high valuations seen across financial markets. We expect that the removal of this ‘loose sleeve’ will cause the multipliers investors are willing to pay for a unit of future earnings to decline. Tech stock ratings are no exception. People can say that, at times, they have somewhat isolated themselves, failing to discern the wheat from the chaff.
Semiconductor stocks and those in the application software sector which encompass many cloud computing companies are practically on the list of those experiencing the largest multiple losses. However, semiconductor chips and cloud computing are two pillars of the pillar for achieving an introduction to a more digital global economy. These have been left for more. Full-year 2022 peak expectations for the global technology sector were raised 4% yesterday. The highlight for semiconductors is their returns, which are down -7.3% year-to-date, driven by upward revisions.
Tech and Tech-Adjacent Under Pressure
On the other hand, the application software sector, which acts as a leading indicator for cloud computing stocks, fell 15%, despite a 1.9% improvement in full-year earnings outlook compared to the lower forecasts. The mismatch between the collapse in exchange rates and optimistic earnings estimates suggests that there is more at stake than fundamentals suggest, the first aspect of recent performance in the sector. Truly, it is difficult to digest the reduction in valuations in the face of high rates, even in good times.
But investors should be clear that these cloud computing models simply use their ability to execute long-term strategies to make quarterly returns attractive. We believe the resilience of the sector’s earnings is due to the favorable cyclical environment. Given the risk of inflation causing everything to cease profits or stagnate purchasing power, Semiconductor producers’ expectations have been revived for several reasons. Order fulfillment is accelerating, overcoming recurring supply chain issues, and prices remain strong, thanks to the massive demand for both analog and more complex digital chips.
Conclusion
The fueling of this appetite comes from the growing awareness among conglomerate CEOs and executives that the use of data the collection, analysis, machine learning, and automation possibilities conferred by this chip expansion are a good way to improve their company’s operating economy in the medium to long term. No one likes volatility, not even investors. But the stock rebalancing it generates in the tech world, reflecting past losses, can offset it with another benefit. The sector has received more money, and therefore higher valuations, some of which are unspecified.
The shift toward monetarist policies, which have lost support for many stocks that failed to make it, and what matters most for investment activists is that it has allowed some of the stocks whose fundamentals thus enjoyed themselves more than their valuation deserved to gain attractive entry. Technology investors should be wary of the risks. If these increases are the kind the market is already pricing in, volatility could increase. They could also push the economy into a recession. Although it could spoil the party for cyclical tech beach bums, secular growth beach bums are urging them to stay on the right path.
