Key takeaways:
- Tech stocks fell more than 30% in 2022, more than the overall market drop of 20%.
- The decline came due to higher interest rates, high inflation and uncertain economic conditions.
- Some analysts believe specific sectors, like cybersecurity and robotics, present an opportunity for investors.
The year 2022 was a turbulent one for the stock market, with the S&P 500 ending the year down nearly 20% overall.
Tech had a particularly rough year, with the Dow Jones U.S. Technology Index, an index tracking major tech companies, down more than 35%. The NASDAQ, another tech-focused index, was down over 33%.
Many investors worry that the tech slump is a bad sign for the economy and wonder how long it will continue. Q.ai has answers.
What happened?
2022 was a tumultuous year. War broke out between Russia and Ukraine, oil prices and inflation soared, wages remained low for many workers, interest rates rose and many feared the beginning of a recession.
All of these factors combined to force stocks downward.
These downturns particularly impacted tech. 2022 was the first year the NASDAQ saw four quarters of dropping values. It was the third-worst year for tech after 2008 and the bursting of the dot-com bubble in 2000.
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Major players in the world of tech saw huge losses. Meta lost two-thirds of its value, and Tesla saw similar drops. Amazon also lost half its value.
The number of IPOs was also down, and recently IPOed businesses often lost as much as 80% of their value this year.
Crypto, which has seen booms in the past few years, also crashed. Major coins, like Bitcoin and Ether, lost 60% of their value. Coinbase, the only major crypto company on the NASDAQ, saw shares decline by 86%.
Why tech stocks fell
The fact that tech stocks fell in 2022 is obvious. What is less clear is why. Figuring out why specific stocks rise and fall in price is often difficult, but it is easier to identify what influences trends across the market and sectors.
One reason that tech stocks fell is that the Federal Reserve began raising interest rates. Tech companies and startups relied on the cheap money that interest rates of almost 0% provided.
Massive companies, like Uber, still did not turn a profit. Instead, they’ve relied on investment and financing to continue growth in hopes of future profits.
As rates rose, investors became less willing to put money into businesses in hopes of future returns and instead sought immediate cash generation. Many tech businesses saw the writing on the wall and began downsizing and cutting jobs.
Inflation also played a role. Costs for many goods and services skyrocketed, with transportation seeing significant volatility due to shifting oil prices. This made things difficult for numerous ecommerce companies that rely on shipping products to their customers’ doors.
Many tech companies rely on advertising to generate a large portion of their revenue. As other companies have cut advertising budgets in response to recession fears, companies like Alphabet, Meta and the newly private Twitter have seen ad revenues fall.
The strengthening of the U.S. dollar also played a role. American multinationals brought in less money from their overseas business, significantly impacting many major tech firms.
How long will the slump go on?
Many investors and economists fear a recession is coming, which would be bad news for tech stocks. Historically, tech stocks fare poorly during recessions, seeing layoffs and slowing growth as investors flock to more stable investments.
The impact of higher interest rates will likely continue for quite some time. The Fed expects to continue raising rates through the end of 2023 and hold them steady until at least 2024.
This indicates that tech businesses have at least two years of higher rates before they can expect some relief from the central bank.
Many believe tech stocks will see another major dip in the coming months. Earnings season often sees huge movement in stock prices as companies either meet or miss investor expectations. Many worry that current estimates are optimistic.
If tech firms start missing expectations, more large dips could be on the horizon.
What it means for investors
Investing in tech during uncertain times can be difficult. Some may choose to move to safer investments, while others will look for opportunities to buy strong businesses at bargain prices.
Investors who can handle volatility in their portfolio might consider investing in well-established tech companies during the downturn, hoping they’ll recover as the economy improves.
One thing to consider is that tech isn’t a monolithic entity. It includes ecommerce, cybersecurity, social media and dozens of other industries.
Some analysts believe that specific sectors of the tech industry will outperform the tech market as a whole. For example, as more companies realize cybersecurity is essential for keeping their business safe, the cybersecurity industry could outperform other sectors within the industry.
Similarly, with low unemployment and workers fighting for wage increases, robotics companies and others involved in automation could see success.
Cautious investors should consider more stable investments. However, holding a position in a diversified ETF tech fund could help limit the risk of going all-in on a single firm.
It’s no secret that investing, especially during a recession, is hard. That’s where Q.ai can help. Q.ai uses artificial intelligence to design a portfolio based on any investing goal and economic situation. It designed Investment Kits that can make investing easy and fun.
The bottom line
Tech had a difficult 2022, and signs point to 2023 being similarly hard for the industry. Finding strong investment opportunities can be stressful for many investors, leading some to move to safer investments, whether those be blue-chip stocks or fixed-income securities.
However, those willing to take risks may see significant returns.
Download Q.ai today for access to AI-powered investment strategies.
