Rising Interest Rates Tank High-Flying Tech Stocks
Technology and internet stocks have led the way for much of Wall Street’s bull market run, propelling the stocks of big names like Apple, Amazon and Google’s parent company sharply higher along the way.
Now those high-flying stocks are at the forefront of a wave of selling as investors fret about the possible impact of a recent surge in interest rates.
Those jitters gave the Nasdaq composite index, which as a high concentration of technology companies, its biggest loss in more than two years Wednesday. Apple, Microsoft, Amazon, Netflix and Alphabet, Google’s parent company, all posted steep declines.
“The sell-off was perhaps a little overdone,” said Lindsey Bell, investment strategist at CFRA. “A lot of it may have been investors just kind of taking profits in some of the high-flyers of the year that also have high valuations.”
The yield on the 10-year Treasury jumped from 3.05 percent early last week to more than 3.20 percent Wednesday, a seven-year high. Interest rates tend to follow increases in bond yields, eroding profits for companies, which have to pay higher interest-rate costs to borrow money. They also make bonds more attractive investments relative to stocks.
Technology and internet-based companies are known for their high profit margins, and many have reported explosive growth in recent years, with corresponding gains in their stock prices. That’s made them particularly vulnerable to higher interest rates, because it makes the stocks’ already high valuations look even more stretched.
Investors have other reasons to worry about the tech sector stocks. Those include the potential impact that the U.S.-China trade dispute may have on big tech companies, which tend to do a lot of business in China.
In addition, the big-name tech stocks have been faring so well for so long that investors have been betting on even bigger things to come from the companies. Those wagers might take longer to pay off, or worse, fizzle completely if a slowing economy or recession undermines their future growth.
Facebook and Google, for instance, might not be able to entice as many new users to their free digital services, and the advertising that generates most of their revenue might shrivel anyway.
For Amazon, it might mean consumers curtail their spending on merchandise in its e-commerce site and decide they really don’t need an internet-connected speaker like the Echo, after all. And Netflix might have more difficulty attracting subscribers, or even start seeing more cancellations to its online streaming service if households feel squeezed.
There’s another cloud hanging over Netflix’s stock, too. The company is scheduled to report its third-quarter results Tuesday. After it missed its target for subscriber growth during the spring, investors may be bailing out of its stock for fear the trend continued during the summer months, when it’s traditionally more challenging to get people to sign up for a video service because of vacation schedules and good weather outdoors.
The margin of error for these companies is extremely thin because the dramatic run-up in their stocks has driven a key stock benchmark — price-to-earnings ratio — to astronomical levels. None more so than Netflix, with investors still paying the equivalent of $149 for every $1 in earnings, even after its stock has tumbled 13 percent during the past week.
Even with the recent sell-off, Netflix’s stock is still worth nearly three times more than it was just three years ago and seven times more than it was five years ago.
Long-established technology companies like Apple and Microsoft, which now pay dividends because they aren’t growing as quickly as they once did, have also been caught in the downdraft. That’s despite Microsoft still making software that powers most of the personal computers in the world and Apple’s iPhones and other gadgets still attracting legions of loyal fans willing to pay premium prices for the products.
Apple’s popularity shows in its profits. If analysts’ estimates prove accurate, Apple earned $13.3 billion from July through September, or about $6 million every hour. The company is scheduled to report its earnings on Oct. 30.
“We’re still optimistic going into third-quarter earnings, with regard to technology,” Bell said.
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