Tech’s Decade of Stock-Market Dominance Ends, For Now
Sector’s tumble is worst since 2002; value investors take victory lap.
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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Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
4 min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
