After a stellar run since the bear market of 2020, the broader equity indices are trending lower in the first two weeks of 2022. The S&P 500 Index is down close to 3% year-to-date while the tech-heavy NASDAQ has lost over 5% in 2022.
The ongoing sell-off in tech stocks continued in the last week as the Technology Select Sector SPDR Fund (AMEX: XLK) has also declined by 5.6% year to date.
Despite the pullback, Wall Street remains bullish on MSFT stock and expect Microsoft’s Azure business to benefit from increased cloud spending by enterprises. Investment bank, Wedbush explained, “Our December quarter checks for Microsoft have shown incremental strength again as the Azure cloud growth story is hitting its next gear of growth in Redmond.”
The increase in Treasury Yield rates have slowed recently as inflation numbers have gained pace but it did not offer any respite for tech stocks. Last week, inflation rates touched multi-year highs while weekly jobless claims rose by 23,000 which was unexpected, but attributed to the impact of the new COVID-19 variant.
The Omicron disruptions will be short-lived but investors need to brace for interest-rates hikes soon.
Bank stocks reported quarterly results
Major banking companies reported quarterly results on Friday. Several bank stocks have outpaced the broader markets in the past 15-months as the economy was supported by trillions of dollars deployed via federal benefits.
JP Morgan (NYSE: JPM) which is the largest bank in terms of assets, beat Wall Street revenue and earnings estimates. However, the stock was still down by 6% on January 14. Its earnings were bolstered by credit reserve releases and the company also warned it might miss a key profit target in the next two years.
Citigroup (NYSE: C) shares also fell over 1% despite beating revenue estimates, but it also reported a 26% decline in net income. This led to a drop in share prices of Morgan Stanley and Goldman Sachs as well which are due to report Q4 numbers in the next week.
Wells Fargo (NYSE: WFC) stock soared by almost 4% after CEO Charles Scharf confirmed loan demand was robust in the second half of 2021. Wall Street remains wary about the rising expenses on banking companies that led to the decline last week.
More pain ahead for tech stocks
The road has been bumpy for technology investors in 2022 as the Federal Reserve displayed an aggressive approach towards combating rising inflation rates. There is a good chance that interest rates will also move higher within the end of Q1 of 2022.
According to Alicia Levine, head of equities, capital markets advisory at BNY Mellon Wealth Management, “The first quarter should be rising yields, rising rates, outperformance of cyclicals, and we think that the long-duration growth names are going to have a challenging quarter.”
Analysts expect earnings to rise by 20% year over year in Q4 of 2021. However, this expansion will primarily be driven by companies part of the energy, materials, industrials, and discretionary sectors.
Comparatively, tech stocks are expected to increase earnings by “just” 10% this year. It’s quite possible for investor capital to shift towards value stocks from growth stocks and this transition has already quickened in recent months. For example, the Energy Select Sector SPDR Fund (AMEX: XLE) has risen close to 13% in 2022, compared to the negative gains reported by XLK.
Rising interest rates might also hurt growth stocks as it will increase the cost of debt capital resulting in higher interest payments and a narrower bottom-line.
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