Tech giants have bigger problems than rising interest rates: Morning Brief – Yahoo Finance | Jewelry Dukan

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Friday, 09/16/2022

Today’s newsletter is here Julia Hyman, Moderator and Correspondent at Yahoo Finance. Follow Julia on Twitter @Juleshyman.

Another day, another crash in tech stocks.

The disproportionate damage the sector has suffered of late has raised questions as to why exactly the technology seems so vulnerable to rising interest rates.

The answer? Rate hikes are far from the technology’s only problem.

Traditionally, rising interest rates have impacted many sectors – not just technology. When interest rates rise, it costs companies more to borrow money to fund their businesses. It can also mean consumers have less disposable income because they’re also paying more for mortgages, cars, and credit cards. The last point is particularly relevant now. Not only are homebuyers paying more than 6% interest on a 30-year mortgage for the first time since 2008 — they’re also paying 13.5% more for groceries than a year ago.

In other words, we are seeing the double whammy of inflation and rising interest rates. While the Federal Reserve has been raising interest rates to curb inflation, the central bank still has a long way to go. Data released on Tuesday showed inflation remained high at 8.3%, although it moderated slightly in August.

Of course, this environment has taken its toll on the broader market. The S&P 500 is down 17% this year, beginning its decline before the Federal Reserve began raising interest rates on March 16.

Still, the technology has been hit harder. The S&P Info Tech Index — whose constituents include tech giants like Apple (AAPL) and Microsoft (MSFT) — is down 25% this year. The Communications Services Group, which includes Netflix (NFLX) and Apple (AAPL), is down even further — 33%.

Netflix Co-CEO Ted Sarandos accepts the 2022 Economic Development Visionary Award during the Hollywood Chamber of Commerce’s 2022 Economic Development Summit in Los Angeles, California, United States, August 25, 2022. REUTERS/Mario Anzuoni

Leaving aside the modeling and roughing-out of higher funding costs and whether Netflix pays more to service debt than energy companies (the top S&P 500 performers this year).

Part of the tech’s underperformance could be down to sentiment. Speaking to Yahoo Finance’s Brian Sozzi this week, Eric Sheridan, managing director of Goldman Sachs, pointed out that technology is an inherently risky sector — and right now, investors are yearning for safety as they know what’s next are not clear to the Fed.

“Ultimately, tech investors want insight into a calm economic environment,” Goldman Sachs managing director Eric Sheridan told our Brian Sozzi at his firm’s tech conference this week. For tech stocks to do well, he added, “You really need a stable macro environment where people feel comfortable putting more risk back into their portfolio.”

But it’s not just about feelings. Technology companies across the spectrum have seen less demand of late as COVID-19 has relaxed and inspired consumers to reconnect with the physical world. Investors have had to readjust their expectations for the future growth of companies like Netflix and Meta (META).

Semiconductor manufacturers have been particularly hit as they have struggled to adapt to the supply shortages caused during the pandemic, followed by the cooling of this trend.

Paul Meeks, a veteran tech investor and portfolio manager at Independent Solutions Wealth Management, told Yahoo Finance that one of the main reasons he’s currently underweight tech is semiconductors.

While Meeks believes in technology for the long term, he claims the current inventory correction is currently putting it at risk. “I’m really concerned now because the main driver for the technology sector is semiconductors. Semiconductor stocks are at risk,” he said. “Semiconductor companies need to get us out, and unfortunately this is where they’re really sagging. I don’t see any short-term relief.”

While inflation and interest rates are two issues for the tech industry, they’re clearly not the only challenges the sector is currently facing. Investors could continue to stay away, at least in the short term.

What to see today

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  • 10:00 a.m. ET: University of Michigan Consumer SentimentSeptember preliminary (60.0 expected, 58.2 last month)

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