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Overburdened by tech stocks, the Nasdaq plunged 3.74% to 13,878.82 points. And because the big-tech sector also weighs a lot in the S & P500 index, it lost 2.44% on Thursday and ended the day at 4,477.44 points. Dow Jones returned 1.45% to finish with 35,111.16 points. Among the 30 blue chips, Merk and Microsoft, losing almost 4%, were the worst.
The smaller and larger tech companies listed on the Nasdaqu have long been valued very high relative to reported earnings. It is worth noting, however, that after Thursday’s sell-off, Meta is valued “normally”, at just over 17 times the profits for the last four quarters. Only that the high valuations of big-techs were embedded in expectations for much higher results in the near future. And these have just begun to be questioned by investors.
This is combined with the capital rotation that has been going on for over a year, from growth companies (especially technology companies) to value companies. Many analysts assume that the latter will do better in an environment of high inflation and higher interest rates. Meanwhile, the big-tech sector has benefited not only from technological changes over the past decade, but also from the unusual combination of low price inflation, decent economic growth and record low interest rates.
Now that is all changing. The Federal Reserve ends its bond purchase program (also known as “reprinting money”) in March. IN
Thursday the Bank of England surprised the market with the end of QE and unexpectedly hawkish attitude of some members of the Monetary Policy Committee, almost half of whom wanted an interest rate hike by 50 bp at once. Even the head of the ECB mentioned at the press conference that inflation is higher than the recent forecasts assumed.
Normalization of monetary policy amidst high inflation, rising (nominal) wages and slower economic growth create a dangerous mix for the still highly valued US stocks. After three years in a row of excellent rates of return, the New York indexes started the year with a sharp correction in January, and the rebound that has been sprouting in recent days was stopped today by the Facebook catastrophe.
Krzysztof Kolany
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