Why Are Tech Stocks Selling Off And What Is The Outlook?

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Tech Share Performance Vs. Overall Market

The stock market, and in particular tech stocks, has been selling off over the past year. In this article my main focus is attempting to understand why tech stocks have been selling off and what to do about it.

Before addressing tech stocks exclusively, I wanted to address the overall market. In Table 1, I list the top 11 sectors on a 5-year, 3-year, and 1-year performance basis. For long term investors it is worth noting that:

  • Over five years, Tech stocks have outperformed the overall U.S. market by a factor of 3X, and the next two sectors, Consumer Discretionary and Healthcare by 2.5X.
  • Over three years, Tech stocks have outperformed the overall U.S. market by 2X and the Consumer Discretionary and Healthcare by 2X.
  • Over 1 year, Tech stock performance is comparable to the U.S. market, but well behind the leading sector Energy.

My point is that tech stocks may be taking a battering now, but over a long period it is the performance leader of all sectors. Smart investors keep a long-term perspective.

Another point is the rapid recovery of Tech shares, which I list over the past seven days. Tech has moved up the list and is outperforming the U.S. market with a gain of +8.0%. My analysis below will discuss this recovery.

table

The Information Network

In Table 2, I hone in on the Tech sector and probe deeper into the Semiconductor and Semiconductor Equipment sectors. Segmenting the semiconductor and semiconductor equipment markets, we see strongest growth in the latter segment for semiconductor equipment over 3-years and 5-years, according to The Information Network’s report entitled “Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts.”

table

The Information Network

Individual Semiconductor Share Performance

Chart 1 shows YTD share performance of semiconductor (semiconductor and equipment) companies based on the worst performance. Also noted in red is the performance of the S&P 500. Infineon (OTCQX:IFNNY) was the worst performing and Silicon Motion (SIMO) the best. Obviously there are more than just 13 companies between the two companies.

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The Information Network

Chart 1

What Are The Root Causes

U.S. stocks have fallen since hitting a record high January 3, 2022, hence YTD in Chart 1. It’s beyond the scope of this article to pinpoint the positives and negatives of each of the stocks listed in Chart 1 above. All we need to see is the overall share performance of the U.S. Market (top line of Table 1) to see the switch from positive to negative growth in the past year.

Clearly the leading concerns from investors, which are mirrored by the public are:

  • Slowing economic growth rate in the United States
  • Concern of recession
  • Tightening monetary policy from the Federal Reserve
  • Rising inflation rate
  • Rising interest rates
  • Residual global supply chain challenges
  • Geopolitical concerns and residual damage like high oil prices

Microeconomic Factors

As the second quarter comes to a close, tech companies will soon be announcing earnings. Micron (MU) is a harbinger for the quarter as its fiscal quarter ends a month earlier than a calendar quarter. MU announced F3Q on June 30 reporting an EPS of $2.59 that beat by $0.15 and revenue of $8.64B (+16.4% Y/Y) that was in-line.

However, Q4 Non-GAAP Outlook was weak. Revenue guidance was $7.2 billion ± $400 million vs. consensus of $9.13B, and diluted earnings per share were $1.63 ± $0.20 vs. consensus of $2.58.

Macroeconomic Factors

Consumer Confidence

The Conference Board Consumer Confidence Index decreased in June, following a decline in May. As shown in Chart 2:

  • The Present Situation Index-based on consumers’ assessment of current business and labor market conditions-declined marginally to 147.1 from 147.4 last month.
  • The Expectations Index-based on consumers’ short-term outlook for income, business, and labor market conditions-decreased sharply to 66.4 from 73.7 and is at its lowest level since March 2013 (Index, 63.7).

chart

Confidence Board

Chart 2

Consumers grew more pessimistic about the short-term (6 months) business conditions outlook in June.

  • 14.7% of consumers expect business conditions will improve, down from 16.4%.
  • 29.5% expect business conditions to worsen, up from 26.4%.

Consumer Sentiment

The University of Michigan’s preliminary June sentiment index fell to 50.0, from 58.4 in May, as shown in Chart 3. This is the lowest recorded level since the university started collecting consumer sentiment data in November 1952. Record gas prices helped push down the consumer sentiment index. Rising inflation continues to frustrate consumers – about 46% of consumers surveyed laid the blame on inflation, an increase from 38% in May.

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YCharts

Chart 3

U.S. Inflation

Chart 4 shows the inverse correlation between consumer sentiment and inflation in the U.S. over the past 1-year period.

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YCharts

Chart 4

S&P Share Trend

This serves as a backdrop for demand for semiconductors. When people feel poor, they stop using discretional money on gadgets that use chips in order to use that money for gasoline and food.

Historically over the past 3-year period, there has been no correlation with S&P Technology Index (IXT) share price and US Consumer Sentiment, as shown in Chart 5, except for the past 6-month period.

chart

YCharts

Chart 5

10-Year Treasury Rate

There is also a correlation between the 10-year treasury rate and S&P share price. As seen in Chart 6, since 12/17/21, the 10-year treasury rate has increased while S&P share price has decreased starting on 12/27/21.

We also see that 6/16/22, the S&P reached a low after the 10-year treasury rate reached a peak on 6/14/22.

This relationship has been extremely strong in 2022. As you can see in Chart 6, the sharp ascent in the 10-year throughout this year has directly led to a strong drop in tech stocks.

chart

YCharts

Chart 6

According to an article in Nasdaq.com:

“The most crucial factor driving tech stocks in 2022 has been the 10-year Treasury yield. This is the yield investors earn for buying 10-year notes issued by the U.S. Treasury. It’s the rate of annual return investors can expect when buying a risk-free bond from the U.S. government. And it’s widely considered the U.S. economy’s “risk-free rate.”

My Outlook For Tech Stocks Overall?

The leading concerns from investors listed above and repeated here show no signs of abatement:

  • Slowing economic growth rate in the United States
  • Concern of recession
  • Tightening monetary policy from the Federal Reserve
  • Rising inflation rate
  • Rising interest rates
  • Residual global supply chain challenges
  • Geopolitical concerns and residual damage like high oil prices

The exceptionally strong correlation in 2022 between the rise in the 10-year Treasury and the drop in tech stocks cannot go unheeded. So, I recommend investors wait for the 10-year to top out.

In the tech area, I currently recommend my top picks to readers and my rational. The thesis of this article is the relationship between share price and the 10-year Treasury. Each of these companies has been impacted.

Semiconductor Foundry – TSMC

I wrote about TSMC (TSM) in an April 18, 2022 SA article “TSMC: Top Foundry As Computing And Automotive Chip Demand Rises,” so I refer readers to that article.

Semiconductor Memory – Micron

I wrote about Micron (MU) in a June 23, 2022 SA article “Is Micron Technology Stock A Buy Before Upcoming Earnings?” so I refer readers to that article.

Semiconductor Equipment – KLA

I wrote about KLA (KLAC) in a June 20, 2022 SA article “KLA: Adding Granularity To Its Investor Day Presentations,” so I refer readers to that article.

Hardware, Storage and Peripherals Stocks – Apple

I wrote about Apple (AAPL) in an April 11, 2022 SA article “Is Apple Stock A Good Buy For New Investors?” so I refer readers to that article.

Top Internet and Direct Marketing Retail – Amazon

Amazon is dominant position in the cloud-computing market, particularly in the Infrastructure as a Service (IaaS) space under its Amazon Web Services (AWS), which is one of its high-margin generating businesses. According to the company AWS powers hundreds of thousands of businesses in 190 countries around the world, with data center locations in the U.S., Europe, Brazil, Singapore, Japan, and Australia.

I wrote about Amazon (AMZN) in a May 6, 2022 SA article “What Chip And Cloud Strength Mean For Micron Technology,” so I refer readers to that article.

Main Takeaways

The first consideration for readers is to evaluate their investing strategy on the basis that tech stocks have been the highest performing sector. They should be considered long-term investments due to the cyclical nature of the sector and how macro factors can dramatically impact share price.

Secondly, in this article my thesis is the correlation between share price and the 10-year Treasury rate. This correlation has been strong in 2022. Although analysts at Morningstar found minimal correlation between the 10-year treasury and technology stocks over a 15-year period, since January 2022 the rise in the 10-year due to inflation fears has significantly impacted technology stocks. Thus, as I stated above, if looking to buy the dip in tech stocks, you want to wait for the 10-year to top out.

Third, in previous Seeking Alpha articles I noted that some tech companies, for whatever reason, were not strongly impacted by the 10-year Treasury. Texas Instruments (TXN) is an example.

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