Focusing on the downward tendency of the tech-heavy Nasdaq 100 index, top CEOs from tech and financial industries have declared confidence in the tech market’s future. They also expressed their belief that the industry currently stands on solid foundations, despite suffering from high expectations.
Current indicators are grim, but most experts stress that it is not a result of a confidence loss in the market. Rather, it is due to the normalization bound to follow the recent expansion. 3 factors are the current negative indicators:
- Nasdaq fell 26% from its peak in October 2021
- Tech Market lost approx. $1 Trillion in value
- The NFT market lost 90% of its peak value
The CEO of UBS, Ralph Hamers, pointed out that the underlying business models of tech companies are healthy. He also expressed the need and value behind the offering. Still, we have much to discuss regarding the exact market value that should follow these models.
The US Federal Reserve is raising interest rates to stabilize the market. That means the market will soon gain some trust. This push will need to be against the growing problem of worldwide inflation. How quickly will tech companies and investors respond?
On the other side, China has announced the ease of regulations for tech companies in the Asian nation. Combined, these two forces might push investors and developers to focus more on the Asian market, both financially and technologically.
Highest Volatility Endured the Hardest Hits
A swift drop in tech stocks has left a lot of investors in shock. Many experienced investors have compared this with the dot-com bubble in 1999 and the market-clearing that ensued. Yet, experts stress that the similarities between these events are only surface-level.
Primarily, this downturn is only happening after a full year of exceptional growth in the tech stock price, without a big increase in the market. This trend was bound to overturn at some point. Investors are looking for other markets and opportunities in less volatile fields.
As a result, the highest drop in stock price was visibly for options that rose with the speculative market during the pandemic. In those sectors, like the case with the cryptocurrency and NFT market, the drop was highest in comparison. Yet, it follows the same pattern like the tech giants.
Additionally, rising interest rates are forcing companies to become profitable at a higher pace. This drive often results in companies taking on more risk toward this purpose. After that, they either boom or fail much faster. In a climate like that, it is not out of the ordinary that investors jump quickly through options, not keeping any for long in their portfolio.
Nowhere Near the 1999 Tech Bust
Although the sentiment toward the tech industry has never been lower since the turn of the century, that situation might only be the result of better visibility. Compared to the 1999 dot-com bubble, social media and boutique investors now have a bigger reach than two decades ago.
In the words of Peter Granry, the HES at Saxo Bank, the situation with the tech market comes in, financially speaking, dark times. It comes after the pandemic and a financial crisis, as well as rising interest rates and inflation.
Unlike the dot-com bubble, the technology and services behind current tech companies are real and needed. This means that long-term opportunities for investors do exist. The problem is if these opportunities will be recognized behind the current perception of greatly increased risk.
The internet companies that have ceased to exist during the turn of the century only had an idea behind them. They weren’t in a proven market, and they made no real profits, pushing the company only on venture capital. “Today, that is not the case”, says co-founder of Carlyle Group, David Rubenstein.
He declared his belief that the moves seen presently on the market are an overreaction. It will allow current investors to buy stock with a real value below their reasonable worth.
Industry actors are moving to resolve trust issues, and the SEC is taking action to reduce crypto fraud. As a result, this correction may last shorter than previously assumed.
An Orderly Sell-Off
Speaking on a panel at the World Economic Forum in Davos, the CEO of Citigroup Jane Fraser, noted several differences between the tech stock drop today and what happened in 1999, 2009, and even 2020. In his words, the sell-off was remarkably orderly.
To him, this sell-off looks like a normal fund reallocation. It turned from a highly volatile, overpriced industry to more reliable, under-priced commodities. Items like wheat and corn mirror the tech stock in the opposite direction.
Additionally, Fraser notices that fixed income issuances for both corporate and national stakeholders have remained constructive. Because of this, the current drop in the tech stock value is more of a market correction than a collapse.
Overall, it will be hard to expect higher yields even with companies that show solid profits, like the Nvidia Corporation or Intel. But, for investors who are looking for stable portfolio options, these still hold value, especially if rebought at lower prices.
Icarian Economics
The result and reaction from tech investors and enthusiasts are what many today are dubbing Icarian economics. Extremely high profits and growth have pushed many investors to overcommit. Proverbially, they are flying too close to the Sun. The industry has high hopes and enthusiasm, so disappointment will be comparative.
Maurice Levy, chairman at Publicis Groupe, pointed out that a sector that grows in price 30% or 50% per annum with the industry supporting in growing 25% or 15% is bound to have a correction. This is followed by increased tech investor disappointment.
Venture capital and stabilizing investments are rising with the introduction of boutique investors and investing platforms. Yet, unlike traditional stakeholders, smaller investors are less averse to risk. They are also more influenced by the media. That has contributed significantly to the market’s volatility.
