Tech stocks, which is a shorthand term for technology stocks, are stocks issued by companies within the technology sector. Most major technology companies are represented on the NASDAQ exchange, although some reside in other indices. Before the 1990s, most people didn’t know much about the products that these technology companies produced; however, since then, most of the major technology stocks are now household names. These include companies such as Google, Apple, HP (Hewlett Packard) and Dell, all brands that most people now have in their households.
The Current Situation
Understand that there are always external factors that strongly affect the financial climate here in the United States. Things like pandemics, recessions, conflicts in far-off countries and government policies (both domestic and abroad) can have a huge impact, both positive and negative, on stocks here. In 2022, the NASDAQ (along with other indices) has found itself ensconced in a bear market, and as of the middle of the year, that trend doesn’t look to change anytime soon. While some jittery investors are abandoning tech stocks entirely, others are looking to buy on the cheap to hold for the long term.
Why Are Tech Stocks Down?
Why are tech stocks down? As mentioned above, there are many factors that directly and indirectly affect the price of all stocks, including technology stocks, as well as the consumer price index (CPI) and interest rates. However, when you cut to the nitty-gritty, the two biggest culprits that affect the price of tech stocks are valuation and inflation. Valuation is the process of determining the worth of a company (either current or projected), while inflation is a decrease of purchasing power over time.
Tech stocks generally have been trading at very high valuations in the past few decades, which is one of the reasons they’ve been so appealing to investors, as that made it easier to profit more quickly when compared to other stocks. But in the current market, the availability of cheap cash has dried up due to higher interest rates, which has become a struggle for these tech firms. However, inflation poses a bigger threat here.
Why? Because in times of inflation, interest rates rise. And due to the nature of the valuation of tech stocks, as opposed to value stocks, which are valued on price-to-earning (P/E) ratios (or dividend yield), tech stocks are typically valued on future cash flows. Which, of course, is hugely dependent on interest rates. In addition, the (very real) threat of a recession is unfavorable to all stocks, and tech stocks in particular. When the Federal Reserve raises interest rates to fight inflation, it’s intentionally slowing the economy. Too much of that and there is the chance the country will slip into a recession.
Of course, the entire economy as a whole, and the stock market as a part of that whole, are highly complex entities, and there are many moving parts and factors that can sway things to either a positive or negative direction. Slow economic growth, decisions by the Fed to tighten monetary policies, along with rising inflation and interest rates, all can create a perfect storm that can ultimately lead to a recession — or not.
How This Downturn Affects M&A Activity and Other Business Deals
Unlike previous economic downturns (such as the one in 2008–2009), where merger and acquisition (M&A) activity fell sharply when the economy struggled, 2021 was a record year for M&A activity (more than $5 trillion in volume globally). And given the recent turn of events worldwide (the COVID-19 pandemic, the war in Ukraine, supply chain issues and domestic inflation), it’s quite surprising that the M&A environment looks equally robust for 2022. However, the very same reasons that tech stocks are struggling are the possible reasons that this growth in M&A activity may be stunted.
What Does the Future Hold for Tech Stocks?
As is par for the course, tech stocks tend to enter the doldrums once interest rates are raised. Seeing that some experts are predicting four increases by the Fed in 2022, it looks like there will be no tech rally anytime soon. But, as all seasoned investors who are in it for the long haul know, no trend lasts forever, and when stocks are languishing near the bottom and tech stocks are down, that’s an excellent time to buy.
The Need for Virtual Data Rooms
Because M&A deals are still at an all-time high with tech stocks down, it’s important to know about the role that a virtual data room (VDR) plays in any M&A transaction. A VDR is a secure, online location where companies involved in the M&A process can store and share the documentation that is required for the transaction. CapLinked, an industry leader in the VDR space, delivers virtual data rooms for all types of M&A activity. The features of a CapLinked VDR include document and version management, high-level administrative controls, multiple layers of security, encryption and 24/7 customer support.
Start a free trial to learn more about how CapLinked can expedite the M&A process while lowering the costs with a virtual data room.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Morgan Stanley – 2022 M&A Outlook: Continued Strenght After a Record Year
Morning Star – Why Have Tech Stocks Been Hit So Hard?
Yahoo Finance – Tech stocks have plummeted in 2022 – here’s why