The Collapse of Silicon Valley Bank is a Headwind for Tech Stocks

Last Friday’s collapse of SVB Financial Group’s Silicon Valley Bank Trading has sparked concern that it may be a harbinger of more pain to come for stocks in the technology sector. The surge in interest rates over the past year is only beginning to reverberate throughout the economy, and the high borrowing costs could lead to a slowdown that further deflates the 2020/21 rally in highly valued technology stocks.

Nasdaq 100 Stock Index futures in overnight trade initially jumped more than +2% on initial optimism after U.S. agencies on Sunday introduced a new backstop for banks that will protect all U.S. bank depositors.   Also, speculation increased the banking turmoil will cause the Federal Reserve to back off on its campaign of aggressive rate hikes, which would be bullish for highly valued assets like technology stocks. 

Technology stocks started this year strong, with the Nasdaq 100 Stock Index ($IUXX) (QQQ) up more than +8% through last Friday.  Many technology companies, including Roku Inc, Roblox Corp, and Juniper Networks, entrusted Silicon Valley Bank with their savings, and Sunday’s action by the government to protect depositors eased some concerns. Saxo Capital Markets HK Ltd said, “barring the U.S. Treasury and the Fed failing to stop the contagion, the impact on the technology sector will probably be limited.”   

The collapse of Silicon Valley Bank leaves a void in the financing for many start-up technology companies that will likely be filled by multiple banks.  Silicon Valley Bank had business with 44% of venture-backed technology and healthcare companies that went public last year.  In addition, private equity firms, including Vista Equity Partners, Insight Partners, and Thomas Bravo, have dozens of portfolio companies that banked with SVB.  Private equity firms invested over $6 trillion in the U.S. economy in the last ten years through 2021 and employed over 11.7 million Americans.

The turmoil in the U.S. banking sector might yield good news for technology stocks if it makes the Federal Reserve more cautious about raising interest rates.  Goldman Sachs today said that the stress caused by the banking turmoil might compel the Fed to pause its tightening cycle at next week’s FOMC meeting.

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