A rough year for tech stocks

This will be a year to forget for the once high-flying tech sector. Big names like Meta, Amazon, Tesla and Apple all suffered heavy losses, marking a big change from 2020 and 2021.

 

The Nasdaq 100 reached a record high in the final quarter of 2021, but this marked the peak for the great run higher for the index from the pandemic lows. From the nadir of March 2020 to November 2021’s record high, the index gained an astonishing 150% in the space of around eighteen months.

 

In 2022 inflation fears hit markets with a vengeance, as it became clear that price increases were not, as the Federal Reserve (Fed) had thought, ‘transitory’, but were in fact a more permanent feature that would require a sustained rise in interest rates to combat. Higher rates and rising prices spelled trouble for the global economy, and high-valuation tech stocks were prime candidates for a decline as market sentiment turned and investors turned risk-averse.

 

But that is now in the past. The question now is whether 2023 will be better for the sector.

 

Does 2023 promise better times ahead for the sector?

This was the year that central banks began tightening monetary policy by raising rates and shrinking their balance sheets. Next year is expected to be the year when interest rates find a ceiling, as worries about a recession take hold.

 

For investors, we can expect the focus to shift from the central bank outlook to that of earnings for stocks, and here tech stocks may have some reason for cautious optimism.

 

Stocks like Amazon and Meta have already cut staff in a bid to cut costs, and spending has been reined in at other companies in the sector. Should earnings begin to recover during the course of the year, and if the global economy avoids a recession (or only endures a mild one) then the sector may be one of the first to rebound, as investors look to find those stocks with the strongest upside potential in earnings.

 

What are the risks for the sector?

Like all other sectors, the major hurdle for the tech sector in 2023 will be the size of the global recession, if one arrives.

 

A deep recession will result in further earnings falls, and a gloomy outlook that will descend on the sector and prompt further falls in stock prices. If the Fed keeps on raising rates past March then this will put further pressure on the economy. Further geopolitical tensions in Europe and east Asia would also keep investors in ‘risk off’ mode. In this case tech stocks could well return to their 2022 lows, and indeed go much lower.

 

Amazon share price chart

Amazon is down by around 45% for the year, with two failed attempts to break the 200-day SMA since it fell below this indicator in January.

 

The most recent bounce from support in May and June around $102.50 saw the price rebound towards $145, but the price then reversed after reaching the 200-day simple moving average (SMA), and since then it fell to fresh post-pandemic lows in November. A weak rebound has then run out of momentum, putting pressure on the price and risking a move to fresh lows for the year.

 

The bearish view is firmly in place, and even a move above the 50-day SMA would need to clear the 200-day SMA to even suggest that a medium-term recovery is in play.

Apple share price chart

A loss of 20% for the year has put pressure on the indices, given Apple’s weighting in the likes of the S&P 500. Apple’s resilience and its dominance in the mobile phone market have meant that the lows of the year in June found buyers, and with a higher low around $135 a more neutral short-term view has been established.

 

However, short-term trendline resistance from the August highs continues to hold back gains, and with the failure of the recent move towards $150 the bearish view may well be reasserting itself. Additional declines may well test $135, and then on down to the June low at $130.

Meta share price chart

2022 has been utterly brutal for Meta. This has been down to a combination of fears about Facebook’s decline as a popular platform, a decline in ad revenues and Zuckerberg’s focus on the Metaverse.

 

The stock is down by 63% for the year, and hit a seven-year low in October, having endured a sharp fall throughout the year. The bounce from the October low is the most impressive rally for the stock since the pandemic, but fails to put a dent in the broader downtrend.

Netflix share price chart

Netflix had been declining before 2022 began, and was perhaps the first of the big tech stocks to enter a sustained bear market.

But for now it looks like pessimism has peaked, at least for Netflix, with a steady rally from the June lows having reduced losses by around a third.

The higher highs and higher lows hold the bullish outlook in place in the short-term, with the March low at $324.40 acting as resistance. Trendline support from the June low comes into play towards $250.