Investors across the pond – and elsewhere – have been taken aback by the severity of the recent tech sell-off. At the time of writing, the NYSE FANG+ Index is down 10.3 per cent over the past week. Bad news for a lot of 401(k) holders, and pension pots this side of the divide, although growth stocks in this space have been defying gravity for some time.
Whether investors have been overtaken by events is debatable given that most probably knew that valuations for many tech stocks were difficult to justify in terms of forward earnings. Therefore, adjustments to future earnings profiles through increased discount rates were always likely to be severe: a lot of ‘blue sky’ assumptions were baked into valuations. The reason why growth stocks were on a tear for so long has as much to do with lax monetary policy as it does with the digital transition, although the latter dynamic is certainly not illusory.
Central banks have been kicking the can down the road for the best part of 15 years, so we shouldn’t be too surprised by the current reckoning, although many investors will be minded to take profits at this juncture. It’s only odd that it took so long for inflation to leech into the system.