The stock market in the U.S. has been dominating the rest of the world for nearly four years. Tech companies based in the U.S. are largely unnoticed abroad, but companies like Apple recently passed $3 trillion in market value – more than all companies listed on London’s FTSE 100 combined. As a result, it is tempting to bet against U.S. stock-market supremacy in the face of a tech selloff.
Price-to-earnings ratio
The S&P 500 has been booming for the last decade, and many investors are worried that the high-priced tech stocks will struggle to deliver large gains this year due to stretched valuations. The market is anticipating a series of interest-rate increases and the Russian invasion of Ukraine. This makes 2022 a year of heightened uncertainty.
The recent stock decline has been viewed as the start of a much larger reckoning for U.S. stocks. But, if the tech selloff is a sign of a larger bear market, that reckoning may have already started, or is largely over. According to Nir Kaissar, an asset-management guru and Bloomberg Opinion columnist, the recent decline in U.S. stocks has prompted bets against u.s. stock-market supremacy.
The U.S. stock market has outpaced the rest of the world for four years now, with the exception of big tech companies. However, rising interest rates could end that streak by 2022. The Federal Reserve is signalling that it will raise interest rates in March, and European central banks are holding interest rates and ending the emergency support program.
Another tech stock that has come off of disappointing earnings reports has had a similarly volatile past. Meta Platforms Inc. has bounced twice this year, rebounding from various controversies. However, the stock is currently trading at its lowest level since May 2020, and it is down more than 45% from its September peak. This slump has knocked Meta Platforms Inc. out of the top 10 global companies. And if you can’t find a good buy in Meta, you may want to look elsewhere.
Energy stocks outperformed the S&P 500
The selloff in the S&P 500 has caused investors to reassess their investments. While tech stocks have fallen nearly 40% in the last six months, the energy sector has performed better. This sector accounts for 2.9% of the index, making its gains even more impressive. Energy stocks, on the other hand, are gaining about 4% in February. This unusual volatility could mean that sectors are rotating.
The biggest technology stocks have a massive pull on the broader market, and on Friday, they led the selloff. Apple, Microsoft, Facebook, and Google fell more than three percent. But the energy sector was a bright spot for investors after oil prices jumped early in the day. In addition to the energy sector, Exxon Mobil and Schlumberger were among the best-performing S&P 500 stocks.
However, it is important to remember that a sector’s performance may not reflect the general market’s health. In general, sectors that do well in a bear market tend to do better than other sectors. Investing in a sector that is weaker than its peers could miss a great opportunity. So, it’s crucial to be diversified. If you own tech stocks, be sure to own those that relate to the real economy.
Moreover, the sector continues to face challenges, including the rise in oil prices due to geopolitical pressures, OPEC discipline, and renewed sanctions against Iran. The continued rise in oil prices could slow the US economy and raise inflation. Hence, energy stocks are an excellent investment opportunity. They offer attractive valuations, increasing dividends, and improving fundamentals. If the industry continues to grow at a healthy pace, energy stocks would likely outperform the S&P 500.
Fed’s easy money stance fuels extraordinary bull market in stocks
A decade-long bull market in stocks has been fueled by the Federal Reserve’s aggressive policy to revive the U.S. economy in the aftermath of the Great Recession and financial crisis. The central bank has kept its benchmark lending rate near zero and bought nearly $5 trillion in government and corporate bonds. These actions have pushed asset prices higher, and helped many companies. Silicon Valley titans have reaped the benefits of the Fed’s easy money policy.
But the Fed’s eased monetary policy is not without risk. It could lead to a crash in stock prices, as it did in 2008-09 after the Fed started tapering stimulus measures. As a result, investors are moving their bets to other sectors despite the dangers. If the Fed’s policies do start to tighten, share prices could begin to drop, as the Fed’s easy money policy has made it easier for stock prices to rise.
Despite this risk, the Fed remained consistent with its easy money policy until late 2017. In October 2016, the Fed began shrinking its balance sheet by $20 billion a month, increasing that rate to $50 billion a month by the end of 2018. The decision made by the Fed under Janet Yellen was one of the most successful in the history of the Federal Reserve. During her tenure as chair of the Fed, the Dow doubled and the Dow increased by an average of 13% annually. This is still the second-best annual return for a U.S. stock market, but the Fed is only partially responsible for the bull market.
The financial crisis is the greatest threat to capitalism, yet the Fed steps in to save the day. And once the Fed steps in, markets never correct. It’s like playing no-lose casino. It’s impossible to predict when the next financial crisis will strike. In the meantime, the Fed’s easy money stance keeps interest rates low and costs low. The financial markets feel protected by this ironclad backstop.
Rising interest rates
The rise in interest rates could hurt U.S. stocks, as they lower the value of companies with high future profits. Rising interest rates are also less enticing to investors because they make bonds more attractive than speculative investments. The Federal Reserve has already positioned itself to raise interest rates faster than most of the rich world’s central banks. If the Fed does decide to raise rates, it could damage tech valuations and the stock market.
In addition to tech stocks, analysts are betting against U.S. stock-market supremacy in 2022. The United States’s tech companies have a high price-to-earnings ratio, making them more sensitive to rising interest rates. But the tech sector has also caused investors to bet against the stock market’s superiority, prompting a selloff in these stocks.
With the economy still booming, the Fed is unlikely to stop raising interest rates. The Fed will most likely hike rates at the end of the year, which will lead to a further slump in tech stocks. Rising interest rates have also forced investors to focus on other areas, such as luxury consumer brands, real estate, and energy stocks. However, a tech stock selloff has made the stock market more volatile in recent months.
Investors have been preparing for a possible Fed rate hike by selling expensive technology stocks. In this scenario, the Fed may raise rates again, and the stock market could be hit by a sharp decline in share prices. This is called the “implied risk premium,” which is the difference between stock earnings yields and bonds. Rising interest rates will only result in more volatility.
Impact of tech swoon on global stock market
A massive selloff in tech stocks is impacting the global stock market. As the U.S. economy faces headwinds in the years ahead, this selloff may prove to be the catalyst for the global stock market to correct itself. In addition, it has led to a disproportionately large decline in many tech stocks, which have been trading at record highs for years. This selloff could be a catalyst for investors to reconsider their investments, or even take their money elsewhere.
Share prices in big technology companies have fallen sharply this year, knocking nearly ten per cent off the value of the Nasdaq Composite. High consumer prices have also hit the tech sector as a whole. Earlier this year, the technology sector had become one of the strongest sectors in the market, but high inflation has spooked investors. In response to this selloff, investors are re-engineering their portfolios to make the most of this opportunity.
Rising interest rates, particularly in the U.S., are a major drag on U.S. shares. Rising interest rates slash share prices of companies with future profits. The Fed has been positioning itself to raise rates faster than most central banks of rich countries. Rising interest rates are also a factor in the selloff in tech stocks. Rising interest rates make bonds more attractive to investors than speculative investments.
Despite the risks associated with inflation, investors are increasingly concerned about rising interest rates, which in turn affects the global stock market. As a result, investors have been selling government bonds in recent days. This is hurting tech stocks because it increases the yields on these investments. Additionally, the price of technology stocks is directly linked to the company’s future earnings. As a result, it is likely that the tech sector will see even more declines before a recovery occurs.
