Big tech is given a reality check

interactive investor comments on the recent market sell-off ahead of upcoming tech earnings.

• Inflationary pressures, rate hikes, and ongoing earnings disappointment has triggered a global market sell-off.
• Popular mega-cap technology stocks have felt the impact of this. Examples include Apple, Microsoft, Alphabet, and THG.
• Investment trusts with large holdings in US tech companies have also been impacted. But Scottish Mortgage Trust, which has a large exposure to tech, remains the most bought investment trust on interactive investor among all age groups in January to date.

The US market is home to many of the world’s largest technology companies, and a significant proportion of gains in the S&P 500 have long been driven by a small proportion of technology stocks. However, the beginning of this year has already presented challenges for investors in tech stocks – as a global market sell-off has caused a shift towards traditional value stocks, and away from growth companies.

interactive investor, the UK’s second largest DIY investment platform, assesses the recent market sell-off and the outlook for upcoming technology earning announcements.

Lee Wild, Head of Equity Strategy, interactive investor, says: “The US is by far the most popular home for customers trading internationally, and counted for 20% of direct equity trades last year, second only to the UK at 78%.  These international traders are likely highly experienced in both identifying and owning spicier tech stocks. But spicy shouldn’t be confused with speculative. Well-established big names like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) provide solid exposure to US technology. These may well be exposed to some significant ups and downs – but they are well worth keeping in the bottom drawer as part of a diversified portfolio, having been one of the big themes of the past decade or more.

“Scottish Mortgage (LSE:SMT) has not only provided an obvious route to US tech stocks, but also ownership of Chinese stocks like Alibaba (NYSE:BABA) and Tencent (SEHK:700), as well as a host of younger or unlisted businesses that would otherwise be beyond the reach of UK retail investors. The biggest danger for cautious investors is that they don’t take enough risk when they are young. A consistently risk-averse approach can leave pension pots significantly short of where they could have been. In the most extreme cases it can even require retirement plans to be reassessed. Diversification is key.”

Victoria Scholar, Head of Investment, interactive investor, explains: “2022 has already been a tumultuous time for technology stocks. After an elongated period of outsized gains, with the tech giants driving wider US markets higher, signs that the era of monetary stimulus and rock-bottom rates is coming to an end have spooked high-growth sectors and triggered a broader market sell-off.

“Equities, particularly in the tech sector, have become addicted to cheap money in recent years, with above average indiscriminate gains seen as the norm. Even at the height of the pandemic, markets staged some of the fastest recoveries in history.

“While the overall S&P 500 continued to reach fresh highs last year, declining market breadth meant that fewer and fewer stocks were contributing to the uptrend with an over-dependence on mega-cap tech names. Recent price action has served as a reality check and a stark reminder that markets go down as well as up. This re-rating is a healthy component of market price action, with stocks now fetching more realistic and less bubble-like valuations.”

Reap big tech on the cheap?

With once hyper-inflated technology stocks now trading on lower valuations – this could present a buying opportunity for investors.

Victoria Scholar, Head of Investment, interactive investor, adds: “The Nasdaq’s recent plunge has landed tech stocks in correction territory, with even some of the healthiest names from a fundamental perspective, such as Apple, slumping more than 10% from the 2021 peak.

“With the Fed’s two-day policy meeting conclusion on Wednesday as the key risk event for markets, any signs of more hawkish-than-anticipated rhetoric could see an extension of recent declines. However, given the volatile market backdrop, the Fed is unlikely to rock the boat further.”

“Looking ahead, with tech earnings front-and-centre this week, the sector is now at a fork in the road. If last week’s disappointment from Netflix (NASDAQ:NFLX) is anything to go by, this week’s results could spark another leg lower. However, forecast-topping quarterly scorecards, coupled with upbeat guidance, particularly from Microsoft and Apple this week, could set the stage for some respite, and provide a reason for investors to make the most of the decline in valuations.”

A reminder to diversify

The market rotation towards value stocks could be cause for concern for investors in investment trusts that have a large exposure to US tech companies, such as Scottish Mortgage Trust. However, SMT remains the most bought investment trust across all age groups on ii in January.

Dzmitry Lipski, Head of Funds Research, interactive investor, explains: “Scottish Mortgage Trust won’t go unscathed, but the managers expect this level of volatility - telling investors it seeks to add value over five-year time frames, preferably longer. The investment has proven dynamic in an attempt to curb perceived threats to performance over the long term. It cut the value of its unquoted investments in response to the coronavirus market sell-off in March in 2020.”

“Scottish Mortgage is the largest, and one of the most widely held investment trusts in the industry, so it will always be a bell weather for sentiment in the wider investment trust industry. But investors need to remember too that it is an adventurous option. While past performance is not an indicator of future results, Scottish Mortgage Investment Trust’s track record over the long term speaks for itself, underpinned by a solid investment strategy which targets disruptive growth companies, public and private – which are inherently long-term investments. Investors should remember that it is higher-risk investment due to high portfolio concentration, exposure to tech and unquoted companies and gearing, so it works better as a satellite holding in a well-diversified portfolio.”

Navigating stormy markets

Myron Jobson, Personal Finance Campaigner, interactive investors, explains: “The age-old question of what investors should do amid stormy markets has once again resurfaced following sharp falls. The ‘keep calm and carry on’ investment mantra is easier said than done when it's your pension, dream of retiring a few years early, or even your property deposit at stake. Volatile markets mean there may be more bad days than good days, but avoiding knee-jerk reactions and sticking with your convictions can make all the difference.

“History might not be repeated, but all the evidence shows us that markets grow over time, which bodes well for those who aren't seeking to withdraw their cash anytime soon. By the same token, if your investment horizon is fast approaching, you need to think about whether you can stomach periods of volatility and consider putting your money into safer assets.

“Drip-feeding money into the stock market is often touted as the most effective form of lowering risk while investing. The idea is that making small but regular payments reduces the risk of a big hit. By regularly investing the same amount, you also buy fewer shares when they are expensive and more when they are cheap to deliver a smoothed return.”

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