The high multiples of tech stocks are based on future earnings. Stock prices are based on a calculation of Net Present Value (NPV) which uses interest rates to discount future earnings exponentially. A rise in interest rates decreases NPV exponentially.
Many tech stocks are not profitable. They rely on borrowing which they can’t pay off. Bonds (debts) must be rolled over as they mature – new bonds must be bought to replace the matured bonds. As interest rates rise, the burden of debt grows.
https://www.wsj.com/articles/outlook-for-tech-stocks-darkens…
**Outlook for Tech Stocks Darkens After Rocky Stretch**
**Sector has been more susceptible to rapidly shifting sentiment in the bond market as the Fed aggressively raises interest rates to counter inflation**
**By Gunjan Banerji, The Wall Street Journal, Sept. 10, 2022**
**...**
**Investors are bailing out of technology-focused mutual and exchange-traded funds at the fastest clip since early February, when the tech selloff was first intensifying...Even after the downturn this year, many analysts say tech stocks still appear richly valued. Apple Inc., Microsoft Corp., Alphabet Inc., [Amazon.com](http://Amazon.com) Inc., Tesla Inc., Meta Platforms Inc. and Nvidia Corp. have on average a forward 12-month price-to-earnings ratio of 38, compared with 16.7 for the S&P 500...**
**Expectations for third-quarter earnings within the S&P 500’s information technology and communication services sectors—home to the parent companies of Facebook and Google—have fallen by about 9% and 13%, respectively, over roughly the past two months. Those are the steepest declines among any of the groups in the index...**
**“We continue to believe we are entering the worst semiconductor downturn in a decade given the recession and inventory build,” Citigroup analysts wrote in a note to clients on Aug. 30. The analysts projected that the PHLX Semiconductor Index would fall another 25%. ...** [end quote]
I found a quote in this article particularly stunning. “If you want to pick the best house to buy in this crummy neighborhood that’s the market right now, I think tech is looking relatively attractive,” Mr. Grisanti said. “Should we roll into a recession, they’ll lose me less money than other things.”
If you think that everything will lose money – go to cash!! Christopher Grisanti is chief equity strategist of MAI Capital Management so his job is to advise customers on stock picks. He wouldn’t keep his job long if he said it was time to sell stocks and go to cash.
Fortunately, we are individual investors. We have lots of choices. Cash is always a potential place to stay safe. Short-term Treasuries, I-Bonds and TIPS are the way to protect cash in a high-inflation period.
Wendy