Global equities fell as investors rushed into tech stocks on rising expectations that the US central bank will need to quickly undo stimulus measures that have fueled a surge in stocks over the past two years.
Tech groups led the declines on Wall Street, with the tech-focused Nasdaq Composite stock gauge dropping 2.1% in early trading in New York after falling nearly 8% last week. The broader S&P 500 index fell 1.7%, reflecting declines in Europe and Asia.
Many of the stocks that have driven markets higher since the depths of the coronavirus crisis in early 2020 have fallen sharply in recent weeks and were hit by a fresh wave of selling on Monday. Electric car maker Tesla and chipmaker Nvidia each fell about 4% on Monday.
Investors are focused on the prospect that the Fed will become more hawkish at its rate-setting meeting this week to dampen the surge in inflation.
Goldman Sachs said over the weekend that it expected the Fed to signal it would start raising interest rates from all-time lows in March. The Wall Street bank also warned clients of a “risk that the Federal Open Market Committee may want to take tightening action at every meeting until [the inflation] the image is changing” and that it could raise fares more than four times this year.
Futures markets have predicted that the world’s most influential central bank will raise its benchmark interest rate to more than 1% by December, after holding it near zero since March 2020.
While higher interest rates increase borrowing costs for all businesses, they also make projected corporate earnings worth less in investor valuation models, with an amplified effect for tech companies. and other growth companies whose peak profits aren’t expected for years.
Tech shares have skyrocketed in the pandemic era due to a widely held view that social restrictions have accelerated the advancement of social trends such as online shopping, remote working and gaming.
But speculative tech stocks had reached “valuations [that] don’t make sense in any investment environment,” Morgan Stanley strategist Michael Wilson said in a note to clients, and weren’t falling “just because the Fed is pivoting.”
In the United States, an index of unprofitable technology stocks compiled by Goldman has lost about a fifth of its value this year. The Tokyo Stock Exchange’s mother market for high-growth start-ups fell around 18%.
In Europe, the Stoxx Europe 600 regional equity index fell 3.1% to its lowest level since late November. Its tech sub-index fell 5%, heading for its biggest daily decline since October 2020 and taking its loss so far in January to more than 12%.
South Korea’s tech-heavy Kospi index fell 1.5% and Hong Kong’s Hang Seng Tech index fell 2.8%.
The Vix, Wall Street’s so-called fear gauge that measures expected volatility on the blue-chip S&P 500 stock index, hit 32.4 points – its highest since early December, when financial markets were gripped by nerves over the Omicron coronavirus variant.
The FTSE All-World stock market index lost more than 4% last week in its biggest fall since October 2020, with a subscriber growth warning from streaming giant Netflix casting a shadow over the start of the season quarterly results.