Is a big tech bear market coming in 2022?
TTech investors have experienced a history of “two markets” in the second half of 2021. While mega-cap tech stocks like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Nvidia (NASDAQ: NVDA) Rising alongside stock indexes, investors in PSPC stocks and small to mid-cap tech stocks fell as much as 80% below their highs.
The more these small tech companies fall, the more tempting it can become for investors to go to these big tech companies, which are considered “safe” because they continue to show strength. However, when we dig deeper, there are signs that these big tech stocks may finally run out of steam and fall in 2022.
Nasdaq with a split personality
If you only watch the daily levels of the Nasdaq stock market on TV each day, everything seems to be going for the best in the tech realm. The index is a stone’s throw from all-time highs, which generally means investors are happy at all levels. However, a closer look reveals some strange results.
Image source: Getty Images
Only 30% of the roughly 2,500 Nasdaq stocks are currently above their 200-day moving average, which is the average closing price of a stock over its last 200 trading days. This number is a benchmark that can indicate whether the price dynamics of a stock is positive or negative. With so many stocks below this average, it suggests that the price momentum is negative for most Nasdaq stocks.
So how could it be, with the looming index of historic highs? There is a gap between big tech titles and small tech names. The 100 largest companies on the Nasdaq (called the Nasdaq 100) are up 28% collectively over the past year. These large companies represent the majority of the Nasdaq weighting, which means that they may push the overall index up even if many smaller stocks fall.
The problem of inflation
We have seen high amounts of inflation this year, the most recent economic data indicating that inflation has reached 6-7%. Meanwhile, the Federal Open Market Committee (FOMC) maintained a Federal funds interest rate between 0% and 0.25%. This interest rate is the benchmark against which banks can borrow, and this low rate essentially means that borrowing money costs next to nothing. The FOMC set this rate low to support the economy at the start of the COVID-19 pandemic.
When inflation starts to rise as it has, this could be a signal that the economy is ‘getting too hot’, and FOMC policymakers could start raising interest rates to regain control of inflation. .
Rising rates can make money harder to find in the general economy (it becomes more expensive to borrow) and tends to hurt the valuations of many growth stocks. This fear is probably one of the reasons why so many growth stocks in the tech sector have been trading lower in recent months. Some officials now estimate that the target rate could rise to more than 2% by the end of 2023.
Could tech havens be in trouble?
This chart illustrates how much investors have turned to some of the biggest Nasdaq stocks, including Apple, You’re here, Nvidia and Microsoft. Nvidia is the “smallest” company in this group, with a market capitalization $ 750 billion; the rest are trillion dollar companies. These stocks have appreciated considerably and are multi-bagged despite their enormous size over the past three years.
And although these companies are among the largest and best known companies in the world, the share price has exceeded the actual growth of these companies; valuations expressed in price / sale ratios have doubled (or more) during the same period.
These valuations are now well above their long-term averages, but companies are so large that it is becoming increasingly difficult to grow fast enough to support a higher valuation. No one can predict the future, but it looks like large cap tech stocks with high valuations could be vulnerable to a correction as interest rates rise in the coming quarters.
The real opportunity may lie in high-quality tech stocks with smaller market caps, the ones that investors have viciously sold across the board in favor of the big caps “safe-havens”. Sometimes the market zigzags when you think it’s going to zigzag, and 2022 could very well turn out to be another example of that.
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Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Justin pope has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: March 2023 long calls at $ 120 on Apple and March 2023 short calls at $ 130 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.