Investors dash out of US tech stocks in powerful market rotation

Investors are dumping shares in many of the technology companies that surged during the pandemic as they move to banks, industrial groups and energy producers whose fortunes are tightly linked to the economic recovery.

Even as the big indices that investors use to gauge the strength of the $54tn US stock market appeared placid at the start of the year, the outlook for some of America’s largest companies have shifted.

The fierce rotation has been partly propelled by expectations that the Omicron coronavirus variant will be less disruptive to big global economies than previous strains of the virus.

The move has been amplified by a sell-off in the $22tn Treasury market, the backbone of the global financial system. With yields on US government debt climbing at the start of this year the appeal of many unprofitable companies has been knocked — including many that had only recently gone public. Their valuations are dependent on potential earnings in the future and therefore sensitive to rising interest rates.

“Spec-tech is getting wrecked,” said Hani Redha, a portfolio manager at PineBridge Investments, referring to unprofitable, “speculative” technology companies with high valuations that are being hardest hit.

A closely-followed index collated by Goldman Sachs that tracks the returns of lossmaking tech groups is down 6 per cent this year, widely trailing the 0.2 per cent advance by the benchmark S&P 500. Shares of Berkshire Hathaway-backed software maker Snowflake are down 11 per cent in the first few days of 2022, while ecommerce groups Etsy and Farfetch have both fallen 10 per cent.

Drugmaker Moderna and Covid test processor Quest Diagnostics, which both fared well last year, are down 12 and 8 per cent in 2022.

By contrast, investors have moved into the shares of carmakers Ford and General Motors, as well as banks, including Bank of America and Citigroup. The KBW Bank index is up almost 7 per cent this year, closing in on a record high.

Companies in the travel and leisure industry, among the hardest hit during the pandemic, have also risen, with shares in American Airlines and United Airlines, as well as cruise operator Carnival, moving higher. A Goldman index of companies closely tied to the reopening of the US economy in 2021 — which includes mall operator Simon, the hotel group Marriott International and aeroplane maker Boeing — is up almost 5 per cent so far this year.

Given the swings early in the year, bankers and investors warned that they were bracing themselves for a bumpy ride over the first quarter. Many are squarely focused on the Federal Reserve, which is pulling back pandemic-era support that helped buoy the stock market.

The sharp rise in bond yields in recent days has already galvanised investors, with David Lebovitz, JPMorgan Asset Management strategist, saying it had “destabilised” growth and tech stocks. The yield on the 10-year Treasury has climbed 0.17 percentage points so far in 2022, among the largest three-day rises recorded over the past year, according to Financial Times calculations.

“We are not going for the high flyers,” Lebovitz added. “We are going for the companies that can generate the earnings.”

The potential for further coronavirus mutations could also curtail enthusiasm for stocks tied to the health of the economic recovery, investors cautioned.

“Let’s face it, there is still a significant amount of uncertainty out there . . . the possibility of a new variant could be very problematic,” said Kristina Hooper, chief global market strategist at Invesco. “And frankly, Fed normalisation by itself will create higher volatility.”