Global stocks dropped and investors raced out of tech shares on Monday as market expectations solidified around the view that the US central bank will need to rapidly unwind stimulus measures that have fuelled a surge in equities over the past two years.
The benchmark S&P 500 fell 2.2 per cent, as a sell-off that hit US equities last week accelerated. The index is now more than 10 per cent below an all-time high hit this month, known as a correction.
Technology groups led the declines on Wall Street, with the tech-focused Nasdaq Composite gauge sinking 2.6 per cent, mirroring a slide in Europe and Asia. The fall took the Nasdaq’s losses to more than 17 per cent from an all-time high struck in November.
Many of the shares that led markets higher since the depths of the coronavirus crisis in early 2020 have pulled back sharply in recent weeks, and were hit with a fresh bout of selling on Monday. Electric carmaker Tesla and chipmaker Nvidia each fell around 4 per cent on Monday.
Investors are focused on the prospect of the Fed turning more hawkish at its rate-setting meeting this week to tame surging inflation.
Goldman Sachs said at the weekend it expects the Fed to signal that it would begin raising interest rates from historic lows in March. The Wall Street bank also warned clients of a “risk that the Federal Open Market Committee will want to take some tightening action at every meeting until [the inflation] picture changes” and that it could increase rates more than four times this year.
Futures markets have priced in the world’s most influential central bank raising its benchmark interest rate to more than 1 per cent by December, after tethering it close to zero since March 2020.
While higher interest rates raise borrowing costs for all businesses, they also make companies’ projected profits worth less in investors’ valuation models, with the effect magnified for tech and other growth companies whose peak earnings are not expected for years to come.
Technology shares were high flyers during the pandemic era because of a widely-held view that social restrictions had sped up the advancement of social trends such as online shopping, remote working and gaming.
But speculative tech stocks had achieved “valuations [that] don’t make sense in any investment environment”, Morgan Stanley strategist Michael Wilson said in note to clients, and were not falling “just because the Fed is pivoting”.
In the US, an index of unprofitable tech stocks collated by Goldman has lost about a fifth of its value this year. The Tokyo Stock Exchange’s Mothers market for high-growth start-ups has dropped about 18 per cent.
In Europe, the Stoxx Europe 600 regional share index fell 3.1 per cent to its lowest level since late November. Its tech sub-index dropped 5 per cent, heading for its steepest daily decline since October 2020 and taking its loss so far in January to more than 12 per cent.
South Korea’s tech-heavy Kospi index fell 1.5 per cent and Hong Kong’s Hang Seng Tech index dropped 2.8 per cent.
The Vix, Wall Street’s so-called fear gauge that measures expected volatility on the blue-chip S&P 500 share index, rose to 32.4 points — its highest since early December when financial markets were gripped by nerves about the Omicron coronavirus variant.
The FTSE All-World equities index shed more than 4 per cent last week in its heaviest fall since October 2020, with a warning on subscriber growth by streaming giant Netflix casting a pall over the start of the quarterly earnings season.
