Technology stocks stumble to worst start since 2016

U.S. tech stocks are seeing the worst start to a year since 2016 as fears about runaway inflation imperil the heady valuations left by the market’s run up over the past few years.

The stocks of U.S. technology companies are seeing the worst start to a year since 2016 as fears about runaway inflation imperil the heady valuations left by the market’s run up over the past few years.

Following multiple failed attempts this week to rally back strongly, investors remain hesitant to plow heavily back into shares of growth stocks and there’s still no major signs that the pressure on technology companies will abate anytime soon.

The Nasdaq 100 Index, which includes some of the nation’s technology behemoths, is down more than 4 per cent this year, even after a bounce late Friday that erased its losses from earlier in the week. The broader Nasdaq Composite Index fell for a third straight week. 

High-flying growth stocks are being particularly hard hit by the growing conviction that the Federal Reserve will soon start withdrawing the massive monetary stimulus that has kept the financial system awash in cash since the pandemic hit. 

Worries about rising rates were fueled by data this week showing that U.S. consumer prices soared last year by the most since June 1982 while U.S. retail sales fell in December by the most in 10 months, indicating that higher prices may be dissuading consumers. That threatens to put further pressure on tech stocks with valuations based on future profit growth, since higher interest rates reduce the present value of those expected earnings.

“The Nasdaq has stumbled out of the gate in 2022,” Douglas Porter, the chief economist at BMO Capital Markets said in a note to clients. While he said these high-flying companies have tremendous long-term potential, those distant earnings prospects face “the cold calculation of being discounted by current yields, so the Fed’s sudden turn is a clear-cut headwind for lofty valuations.”