Tuesday’s Selloff Leaves Gloomy Outlook for Tech Stocks

Tuesday’s -5.5% plunge in the Nasdaq 100 Stock Index ($IUXX) (QQQ) was the biggest decline since the height of the pandemic in March 2020.  Tech stocks took a heavy hit with expectations for the Fed to remain aggressive in raising interest rates due to sticky inflation pressures.

During the March 2020 sell-off, technology stocks quickly recovered as fiscal and monetary stimulus kept markets and economies buoyant until vaccines came along.  However, there is no fiscal or monetary stimulus coming to the rescue this time.  Instead, central banks are focused on containing soaring inflation, even at the cost of curbing economic growth and employment.

State Street Global Markets said, “it’s a terrible environment for technology stocks,” and they see further weakness ahead for the sector.  Even good news for technology stocks could not thwart Tuesday’s selling pressures.  Apple (AAPL), the world’s largest company by market value, lost $154 billion in capitalization following Tuesday’s rout, just one day after the company said its new iPhone Pro Max was the best-selling model and surpassed sales of what the older version did in a similar timeframe.

There are still some positives to support bulls and bottom-pickers.  The valuation of the Nasdaq 100 has sunk to 20.7 times forward earnings, close to the recent lows from mid-June.  Also, while the magnitude of Tuesday's -5.5% plunge in the Nasdaq 100 was impressive, it only reversed the gains made in the previous four sessions.  This suggests that Tuesday's selloff was more of a recalibration of inflation and Fed expectations rather than panic selling.

Yet, there is little to suggest that tech stocks at this point can mount a sustainable rally.  UBS AG said, “Tuesday’s selloff is a reminder that a sustained rally is likely to require clear evidence that inflation is on a downward trend.”  The markets will have to wait another month for the Sep CPI and PPI data to see if there was any indication of a sustained drop in inflation pressures in September.

• Stocks Mixed as Inflation Concerns Remain
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• Stocks Mixed After U.S. CPI Shock Raises Fed Rate Risks
• Stocks Plunge as Strong CPI Bolsters Case for Aggressive Fed Rate Hikes