The great bull run for tech stocks may finally be over.
It has been a brutal year for the leading companies of Silicon Valley. Apple’s (AAPL) stock is down about 16% in 2022 — and that makes it the “best” performer of the so-called FAANGs of Big Tech. Facebook owner Meta, Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL) have all done far worse, with Meta plunging 66% this year.
The tech sector has been a market leader for years, but there are growing concerns about the future. Recent earnings have not been great.
Economic downturn would hurt tech
Liz Young, head of investment strategy at SoFi, noted in a report late last week that tech earnings during the third quarter fell 1% from a year ago and that revisions for the fourth quarter have been cut by nearly 10% in recent weeks. It could get worse.
“With this being the first quarter of a meaningful tone change in earnings … I don’t think it will be the last one of margin pressure,” Young wrote. She added that “it’s becoming clear that we may at least see recessionary conditions in some sectors, even if they don’t bleed into all facets of the economy. Tech is one of those sectors.”
There are also legitimate questions about strategy shifts at some companies. Meta, for example, is going all in on augmented and virtual reality while Netflix is now embracing advertising after years of vowing it would not have ads on its platforms.
Broader worries about the economy and advertising spending are hurting the sector. Many of the tech giants have already announced layoffs, and there is speculation that there could be more job cuts coming.
Recession worries don’t bode well for consumer spending, which is bad for Amazon and Apple in particular. And the tech leaders all face tougher competition — in some cases from one another — but also from rivals around the globe.
With that in mind, this could be just the beginning of a tech bear market.
Todd Sohn, director and technical strategist at Strategas, noted in a report late last week that when tech stocks imploded in 2000 as the dot-com bubble burst, it wasn’t until after the 2008 financial crisis before tech resumed a role as a market leader.
Sohn said tech could be in for another long winter ahead, noting that it’s “reasonable to expect that tech could take a backseat over the next couple of years, while energy, industrials, etc. assume the same type of leadership role that they took after the tech bubble.”
Some pockets of opportunity
Still, some argue that tech will bounce back in 2023. But investors may need to look beyond the FAANGs, Microsoft, Nvidia, Tesla and other megacaps.
“Tech is not a monolith. We believe cybersecurity and robotics have the potential to buck the economic cycle given cybersecurity has moved from niche to necessity and robots are mission-critical in fighting supply chain challenges, labor shortages and inflation,” Jay Jacobs, US head of thematics and active equity ETFs, said in a report.
BlackRock (BLK), the owner of the popular iShares family of ETFs, recommends several of its own sector funds as a way to play these trends, including the iShares Cybersecurity and Tech (IHAK), iShares Robotics and Artificial Intelligence (IRBO), BlackRock (BLK) Future Tech, iShares Evolved U.S. Technolog (IETC)y and iShares Semiconductor ETFs.
Shawn Cruz, head trading strategist at Charles Schwab (SCHW)-owned TD Ameritrade, said tech investors are flocking more to cybersecurity since it’s a must have for corporations, regardless of economic conditions, given high profile hacking incidents.
Cruz said that there are some parts of tech that are trading at more “frothy” valuations. But cybersecurity stocks such as Palo Alto Networks (PANW), as well as semiconductors, are more reasonable.
In other words, tech investors should be looking tor more boring parts of the sector, not assets like crypto that are more about hype than substance. Cruz said that winners in tech are not going to be those with the next great idea or app. It’s about providing a service that businesses will need even if the economy slides into a recession.