(Bloomberg) – This month’s record-high brief rally in shares of unprofitable, highly-valued tech companies is starting to look like a short-lived jerk amid a steady drumbeat of hawkish comments from officials of the Federal Reserve.
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A basket of money-losing tech stocks compiled by Goldman Sachs Group Inc. jumped 15% on November 10 after a report showed consumer price inflation in the United States had cooled in October more than expected. The news led to speculation that the Fed had an opportunity to slow its pace of raising interest rates.
Investors tried to keep pushing equities higher: an equally positive report on producer prices led to a dip in the upside last week. But the index has since weakened, leaving it below its November 10 closing level. It fell 2.8% on Monday, on track for a fourth consecutive decline. The Nasdaq 100 index fell 0.5%.
While rising rates have largely hit tech stocks this year, riskier companies have been particularly hard hit. This is a dramatic reversal from the steady rise they enjoyed during the pandemic, when economic stimulus and the Fed’s easy money policies spurred a wave of speculative buying.
“There are people who will buy almost anything on any sign of good news, and a ‘garbage dash,’ where people jump into junky or unprofitable stocks, is a classic thing to see. days like this,” said Randy Frederick, vice president. President of Trading and Derivatives for Charles Schwab Corp.
The Goldman basket is down 62% this year, while the Nasdaq 100 is down 29%. Among notable names, C3.ai Inc. is down 60%, SentinelOne Inc. is down 68%, and Asana Inc., Okta Inc., and UiPath Inc. are all down more than 70%. Even after their declines, all are trading at a premium to the Nasdaq 100 in terms of price over estimated sales.
Higher rates hurt stocks of unprofitable, high-value growth companies the most, as their stocks are valued based on their long-term prospects, with bond yields used to discount value to today’s dollars. benefits that companies may not see for years. Inflation, along with the Fed’s attempt to combat it by aggressively raising rates, sent Treasury yields jumping from 1.5% at the start of the year to 3.76%, and recently hit their all-time high. high level since 2008.
In the latest sign that the Fed may not be about to back down, St. Louis Fed President James Bullard said last week that the US central bank should raise interest rates. interest of at least 5% to 5.25% to fight inflation, well above the current 3.75%. at 4%.
The comments followed a similar statement from San Francisco Fed President Mary Daly. Governor Christopher Waller expressed openness to the Fed raising rates by half a percentage point next month, less than recent increases of 0.75 points, but downplayed the report’s significance. ‘CPI.
“I can’t stress enough that a report doesn’t create a trend,” he said. “It is far too early to conclude that inflation is falling for a long time.”
If the Fed maintains an aggressive bullish strategy, the headwind on yields could become more pronounced. And while the rapid increase in sales has led to these stocks receiving abysmal valuations, the prospect of a recession has diminished their appeal on growth characteristics, giving investors another reason to focus on companies with positive earnings. and lower valuations.
Jim Awad, senior managing director of Clearstead Advisors, expects investors to classify tech stocks into two categories: companies with sustainable earnings and cash flow, which should recoup their losses over time, and then speculative and unprofitable companies.
“Investors will remain timid about the second class of companies,” he said. “They’re so overvalued, they’ve fallen so much, and some investors have been devastated. The momentum game is over. They may be able to bounce back from here, but they won’t be the market leaders like they were before the peak.
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–With help from Subrat Patnaik and Thyagaraju Adinarayan.
(Updates when the market opens.)
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