Tech stocks have been under pressure in the past two weeks, as the Nasdaq-100 index, which tracks the performance of the 100 largest non-financial companies listed on the Nasdaq stock exchange, fell below its 50-day moving average for the first time since March. The index has lost 4% in the first six trading days of August, marking its worst start to a month since December 2022.
The 50-day moving average is a technical indicator that shows the average closing price of a security over the past 50 trading days. It is often used by traders and analysts to identify trends and potential support and resistance levels. A break below the 50-day moving average can signal a bearish reversal or a loss of momentum.
The Nasdaq-100 index has been one of the best-performing indices in 2023, thanks to the strong performance of tech stocks, especially those related to artificial intelligence, cloud computing, e-commerce, and social media. The index has gained 32% year-to-date as of Thursday’s close, outperforming the S&P 500 index, which has gained 19%, and the Dow Jones Industrial Average, which has gained 16%.
Tech stocks face headwinds from earnings, yields, and competition
The recent slide in tech stocks can be attributed to several factors, such as:
- Disappointing earnings: Some of the tech giants, such as Apple (AAPL), Amazon (AMZN), and Netflix (NFLX), reported earnings that missed Wall Street expectations or gave weak guidance for the future. These companies have been facing challenges such as slowing growth, rising costs, regulatory scrutiny, and increasing competition.
- Rising yields: The yield on the 10-year US Treasury note has risen from a low of 1.13% on August 4 to a high of 1.37% on August 10, as investors anticipate higher inflation and faster economic recovery. Higher yields can hurt tech stocks, as they increase the cost of borrowing and reduce the present value of future cash flows.
- Increasing competition: The tech sector has become more crowded and competitive, as new entrants and rivals challenge the dominance of the established players. For example, Tesla (TSLA), which has been leading the electric vehicle market, is facing competition from traditional automakers such as Ford (F) and General Motors (GM), as well as newcomers such as Lucid Motors (LCID) and Rivian. Similarly, Facebook (FB), which has been dominating the social media space, is facing competition from platforms such as TikTok, Snapchat (SNAP), and Twitter (TWTR).
Tech stocks may rebound if fundamentals remain strong
Despite the recent weakness in tech stocks, some analysts and investors remain optimistic about their long-term prospects, as they believe that the fundamentals of the tech sector are still strong and that the current pullback is a healthy correction rather than a trend reversal.
They argue that tech stocks can benefit from several factors, such as:
- Innovation: Tech companies are constantly innovating and creating new products and services that can disrupt existing markets or create new ones. For example, Apple is reportedly working on its own electric car and augmented reality glasses, while Amazon is expanding into healthcare and space exploration.
- Demand: Tech companies are catering to the growing demand for digital solutions and services that can enhance productivity, convenience, entertainment, and communication. For example, cloud computing services are in high demand as more businesses shift to remote work and online operations, while e-commerce platforms are in high demand as more consumers shop online.
- Resilience: Tech companies have proven to be resilient and adaptable in the face of challenges and uncertainties caused by the COVID-19 pandemic and its aftermath. For example, Netflix has managed to maintain its subscriber growth despite facing production delays and content shortages, while Facebook has managed to increase its revenue and user engagement despite facing regulatory pressures and boycotts.
