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

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

By Gunjan Banerji
Thu, Jun 9, 2022 4:38pmGrey Clock 4 min

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.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: June 8, 2022.



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Surveys point to a fresh acceleration in the U.S., even as growth in the eurozone strengthens

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Global economic growth is becoming more broad based, with surveys indicating that business activity in both the U.S. and the eurozone gained momentum in May.

The eurozone economy contracted in the second half of 2023 following a surge in energy and food prices triggered by Russia’s invasion of Ukraine, and the subsequent rise in interest rates intended to tame that inflation.

By contrast, the U.S. economy expanded strongly over the same period, opening up an unusually wide growth gap with the eurozone. That gap narrowed as the eurozone returned to growth in the first three months of the year, while the U.S. slowed.

However, surveys released Thursday point to a fresh acceleration in the U.S., even as growth in the eurozone strengthened. That bodes well for a global economy that relied heavily on the U.S. for its dynamism in 2023.

The S&P Global Flash U.S. Composite PMI —which gauges activity in the manufacturing and services sectors—rose to 54.4 in May from 51.3 in April, marking a 25-month high and the first time since the beginning of the year that the index hasn’t slowed. A level over 50 indicates expansion in private-sector activity.

“The data put the U.S. economy back on course for another solid gross domestic product gain in the second quarter,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Eurozone business activity in turn increased for the third straight month in May, and at the fastest pace in a year, the surveys suggest. The currency area’s joint composite PMI rose to 52.3 from 51.7.

The uptick was led by powerhouse economy Germany, where continued strength in services and improvement in industry drove activity to its highest level in a year. That helped the manufacturing sector in the bloc as a whole grow closer to recovery, reaching a 15-month peak.

By contrast, surveys of purchasing managers pointed to a slowdown in the U.K. economy following a stronger-than-expected start to the year that saw it outpace the U.S. The survey was released a day after Prime Minister Rishi Sunak called a surprise election for early July, banking on signs of an improved economic outlook to turn around a large deficit in the opinion polls.

Similar surveys pointed to a further acceleration in India’s rapidly-expanding economy, and to a rebound in Japan, where the economy contracted in the first three months of the year. In Australia, the surveys pointed to a slight slowdown in growth during May.

Businesses reported that they were raising their prices at the slowest pace since November, which should reassure the European Central Bank. However, the eurozone continued to add jobs in May, suggesting that wages might not cool as rapidly as the ECB had hoped.

The ECB released figures Thursday that showed wages negotiated by labor unions in the eurozone were 4.7% higher in the first quarter than a year earlier, a faster increase than the 4.5% recorded in the final three months of 2023

The ECB has signalled it will lower its key interest rate in early June, while the Fed is waiting for evidence that a slowdown in inflation will resume after setbacks this year.

Nevertheless, eurozone businesses and households shouldn’t bank on successive cuts to borrowing costs, ECB Vice President Luis de Guindos said. “There is a huge degree of uncertainty,” he said. “We have made no decisions on the number of interest rate cuts or on their size,” he said in an interview published Thursday. “We will see how economic data evolve.”

Continued resilience in the eurozone economy would likely make the ECB more cautious about lowering borrowing costs after its first move, economist Franziska Palmas at Capital Economics wrote in a note. “If the economy continues to hold up well, cuts further ahead may be slower than we had anticipated,” she said.

– Edward Frankl contributed to this story.

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