Tech’s Decade of Stock-Market Dominance Ends, For Now

Big technology stocks are in the midst of their biggest rout in more than a decade. Some investors, haunted by the 2000 dot-com bust, are bracing for bigger losses ahead.

The S&P 500’s information-technology sector has dropped 20% in 2022 through Wednesday, its worst start to a year since 2002. Its gap with the broader S&P 500, which is down 14%, is the largest since 2004. The declines have prompted investors to yank a record US$7.6 billion this year from technology-focused mutual and exchange-traded funds through April, according to Morningstar Direct data going back to 1993.

For years, shares of tech companies propelled the stock market higher, pushing major indexes to dozens of records. Excitement for everything from cloud-computing to software and social media drove an epic runup in far-reaching corners of the market. More recently, the Federal Reserve’s accommodative policies at the start of the Covid-19 pandemic fueled a seemingly insatiable appetite for risky bets.

This year, investors are faced with a starkly different environment. Treasury yields have jumped to the highest level since 2018 while bond prices have fallen. Many of the trends that flourished over the past two years—including bullish options trades, special-purpose acquisition companies and cryptocurrencies—have made a sharp U-turn. Only the energy and utilities sectors of the S&P 500 have gained.

Some investors say the decadelong era of tech dominance in markets is coming to an end. Value investors, who buy stocks that are cheap on measures such as earnings or book value, are taking a victory lap after a long-awaited resurgence in shares of companies such as Exxon Mobil Corp., Coca-Cola Co. and Altria Group Inc.

The S&P 500 Value index is outperforming the S&P 500 Growth index—which includes companies such as Tesla Inc., Nvidia Corp. and Meta Platforms Inc.—by 17 percentage points, its widest margin since 2000. Meanwhile, more than US$48 billion has left funds tracking growth stocks, according to data provider EPFR, while investors have poured more than US$13 billion into funds tracking value stocks.

“It is really a change in market regime,” said Chris Covington, head of investments at AJO Vista. “It would be hard for me to believe that you would have the extreme outperformance of growth that you saw in the last five years.”

To many investors, the bets against tech and the monthslong turmoil in the market echo the dot-com bubble of 2000, when the frenzy surrounding companies that later went bust caused losses for investors big and small. Then, the allure of technological innovation combined with low interest rates spurred a rush into Internet stocks. When the bubble burst, the Nasdaq Composite tumbled almost 80% between March 2000 and October 2002.

This year, individual tech stocks have recorded some of their sharpest-ever falls, with hundreds of billions of dollars in market value evaporating—sometimes within hours. In late May, Snap Inc. shares lost 43% in a single session, their largest one-day percentage decline ever and a loss of roughlyUS $16 billion in market value. Once highflying bets such as fintech company Affirm Holdings Inc. and Coinbase Global Inc. have lost more than half of their values in 2022.

The industry’s biggest companies haven’t been spared. Shares of the popular FAANG stocks—Facebook parent Meta Platforms, Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc.—have all suffered double-digit percentage declines this year that are steeper than the S&P 500’s.

After the punishing start to the year, many investors are speculating what area of the market will be next to tumble.

“When bubbles break, they don’t just tend to fall to fair value—they have a tendency to go to the other side,” said Ben Inker, co-head of asset allocation at Boston money manager GMO.

Mr. Inker, who has been betting against growth stocks with extended valuations for more than a year, said the extra premium at which growth stocks are trading relative to value stocks is standing above historic levels.

Even after the selloff, technology stocks still make up a near-record 27% of the broad S&P 500, hovering near the highest levels since the dot-com bubble, Bank of America strategists wrote on May 27. The firm cautioned it was too early to buy the dip in many of the stocks.

Of course, some investors point to important differences between the current era and the dot-com bust. Although tech-stock valuations soared in recent years, they haven’t approached the levels seen in March 2000 when forward multiples on the S&P 500 touched 26.2. At their peak in September 2020, the forward price/earnings ratio, based on earnings expectations for the next year, hit 24.08, according to FactSet.

Treasury yields, meanwhile, have risen in recent months, but remain well below historical levels. Today, the 10-year Treasury yield is hovering around 3%. In 2000, it was roughly 5%.

To be sure, it’s early yet in the Fed’s rate-hiking cycle. Investors expect the central bank to keep raising interest rates this year. That means yields will likely keep rising, potentially putting further pressure on tech and other growth stocks. Rising yields make the future cash flows of companies less attractive.

If rates keep rising, “the stock market is going to have to move a good deal lower as well,” Mr. Inker said. “It really does depend on where interest rates are going to wind up.”

Worries about how high and how fast the Fed will raise rates have spurred debate about whether the economy is headed toward a recession, though recent economic data don’t point to one in the near term.

Many investors have been betting against tech stocks or closing out bearish positions. Of the S&P 500’s 11 sectors, tech is on track for the biggest drop in short interest in the second quarter, according to S3 Partners, though it remains the market’s most shorted sector. Traders are still betting heavily against Tesla, Apple, Microsoft Corp. and Amazon, making them among the most shorted stocks, just as they were in each of the previous two years.

Still, some investors and analysts remain confident that tech’s dominance isn’t over just yet.

The ratio of bearish put options to call options on the Technology Select Sector SPDR Fund, or XLK, has been elevated, a contrarian signal that suggests the worst may be over for the sector, according to Jay Kaeppel, an analyst at Sundial Capital Research.

“We discovered that things just don’t go straight up,” said David Eiswert, a portfolio manager at T.Rowe Price. “You can’t just buy a basket of tech stocks. You have to differentiate.” Mr. Eiswert said he thinks some tech stocks, such as Amazon, look attractive after their recent declines and that he may increase his exposure to the group.

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

Tech’s Decade of Stock-Market Dominance Ends, For Now

Sector’s tumble is worst since 2002; value investors take victory lap.

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021