Economists are waiting with bated breath as the nation inches closer to a possible recession. Tesla CEO and tech whiz Elon Musk have predicted that the U.S. economy will almost definitely face a recession sooner than later, given increasing inflation and interest rates. Musk isn’t alone in predicting this alarming state of affairs. Top analysts at Goldman Sachs and Morgan Stanley have cautioned their clients about a possible recession on the horizon as well.
How will a possible – and likely – recession affect tech stocks? The Bank of America believes that tech stocks will disappoint if the U.S. goes into recession, estimating that the S&P 500 could plunge by around 20%. These figures were drawn from an empirical estimate from previous recessions, where earnings fell to 14% on average.
However, not everyone thinks tech stocks will dip. Experts at Morgan Stanley believe that investments tied to the retail sector, restaurants, and hotels are at a larger risk of falling, while stocks linked to the tech, Internet, and household goods industries will fare better. This is because, with the economy likely plunging into recession, people can’t afford to spend much on things like deliveries, takeout, or fine dining. There will still likely be sufficient interest in the tech sector. It remains to be seen which tech stocks will shoot and which will disappoint. So, let’s discuss the U.S. recession and see how tech stocks will likely behave.
The U.S. Economic Situation: A Bird’s Eye View
Before we discuss the rise or fall of tech stocks, let’s take a look at what’s been going on with the U.S. economy. There have been concerns about the economy facing recession since earlier this year after reports came out about consecutive GDP declines across two quarters. The decline raised eyebrows and started an important political dialogue: is the U.S. in the recession?
The National Bureau of Economic Research has not made a formal judgment. While there are markers that would indicate the country is already in recession, there are also contradictory signs that signal the economy is making gradual progress. GDP decline and the highest inflation rate in over forty years are signs enough for some people, who insist that the economy is in a recession.
For others, the economic story seems different and almost promising. Some economists are using the Sahm Rule to underline their beliefs. The rule states that a recession occurs when the three-month average of the country’s unemployment rate increases by at least half a percentage over its lowest in a year. According to this rule, the economy is not in recession, since reports in mid-August showed a decrease in people seeking unemployment benefits. What’s more, layoffs have been at an all-time low.
Among all this uncertainty lies the core understanding that, recession or not, the U.S. economy is suffering and any progress has been painfully slow. Certain sectors have taken it harder than others but the stock market remains bearish as nationwide pessimism has set in, with most people believing that even if a recession hasn’t occurred, the country will soon find itself there.
So, where does that leave tech stocks?
The Recent Stock-Related Technological Overview
Panic around tech stocks began sometime in April when Amazon reported a sharp drop, a first in major losses since 2015. The situation seemed to plummet with Netflix (NFLX) plunging by 70%, Alphabet (GOOGL) by 22%, and Apple (AAPL) by 18% in an overall downturn trend.
This situation came about despite most investors believing that tech was a solid investment due to globalization and an increase in tech innovations during the pandemic. However, analysts are cautioning people to wait and watch before panic selling because they anticipate steady growth as economic conditions stabilize.
There is also merit in differentiating between tech stocks. While some tech giants have found themselves plummeting, enterprises such as cybersecurity and cloud operations have fared surprisingly well. On the other hand, stocks related to cryptocurrency and blockchain have taken a hit, with investors panic-selling their bitcoin.
The only sectors that seem to be performing well are energy and utility, with people bailing on tech stocks despite the Fed’s efforts to combat inflation. This is unsurprising, however, as high-interest rates will curtail discretionary spending, forcing the real estate market to plummet, too.
The Conclusive Verdict
It’s a dismal time for tech stocks on the whole. Mega-cap tech is suffering the most, with companies like Snapchat (SNAP) reporting a 79% drop since the start of the fiscal year. Shopify (SHOP) is close on its heels with a 74% drop despite its stock split. Investors seem to be pulling out in droves, as pessimism continues to sweep the nation despite weak silver linings here and there.
The global economic downturn, political conflict, and ever-increasing inflation have caused mass panic. Investors are solely looking at short-term benefits over longer-term ones. This could explain the drastic drop in large-cap stocks, as investors are finding it hard to trust tech giants, preferring to sell and secure their cash instead. In fact, big techs have lost over $1 trillion in overall value recently.
Another reason for the lack of faith in tech stocks is the end of the pandemic. While consumers were more than happy to immerse themselves in virtual experiences during the lockdown, an increasing number of people are now investing in offline activities. These real-world experiences weren’t available a year ago and could explain why the tech market has seen a sharp downturn, except for selected few companies.
The downward trend has also influenced the niche tech market. Venture capitalists who were eager to invest in unique tech startups and quirky tech have lost steam amidst economic uncertainty. No one seems to invest in a niche technology solution when interest rates will continue to rise into next year.
Even as economists try to come to a unanimous verdict about whether or not the U.S. is in a recession, the uncertainty has been enough to send mega-cap and niche tech stocks spiraling. It’s fair to say that this situation is an accurate predictor of what will happen if the recession does hit.