The stocks of the five biggest tech companies have mostly recovered from their sharp drop earlier this week, but that doesn’t mean they’re out of the woods.
Facebook (FB) plunged nearly 5% on Monday after a whistleblower went public with internal documents and three of its social media platforms temporarily went offline. Amazon.com (AMZN), Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL) each were pulled down by more than 2%. But except for Facebook, the group managed to finish the week in positive territory.
Still, shares of the five tech giants are much cheaper than where they were a month ago. Facebook is down as much as 13.6% from its all-time high on Sept. 7, and Apple stock has tumbled 8.8% since that date. All of the five, except for Microsoft, have trailed the S&P 500 since Sept. 7. (The index itself has slid 2.8% from that day until now.)
But the Big Tech stocks could be vulnerable to more pullbacks in the coming months.
The Federal Reserve has been hinting for months that it will start winding down bond purchases by the end of this year, and possibly raise interest rates in 2022 or 2023. The bond market is already reflecting that expectation: The 10-year Treasury yield surged to 1.61% this week, from a September low of 1.29%.
Rising yields are generally bad news for fast-growing tech stocks, because it would make their expected future earnings––often the basis of their lofty valuations today––look less attractive.
Even if the Fed’s shifting policy is already priced in, the yield could continue to rise because it still looks low compared with inflation. The 10-year Treasury’s yield minus long-term inflation expectations is currently below 0%. This means that investors in those bonds are losing value when factoring in inflation.
The 10-year yield’s 2021 peak was 1.75%, reached in March, and it’s reasonable to believe it could head up to that level again. After more than doubling their prices since the pandemic, tech stocks already look too expensive for that. When the 10-year yield was a touch above 1.75% at the end of 2019, the average valuations of the Nasdaq 100 members were 24 times forward earnings. Today, that multiple stands at nearly 28.
The tech giants will also have a high bar to meet when it comes to earnings in the coming quarters. Driven by consumers’ behavior change––more time on the Internet––during the Covid-19 pandemic, the tech stocks have had a blockbuster year. But as the pandemic recedes, that tailwind will be gone, and the companies will have a harder time beating their own records.
Although the stocks of the Big Five tend to move in tandem with each other, investors should pay attention to each of the companies’ idiosyncratic risks.
Facebook, for example, continues to face pressure on both regulatory and reputational fronts. Frances Haugen, a former data scientist at Facebook, testified on Capitol Hill Monday, alleging that company executives knew about the negative impact its platform has on users, but have been misleading investors in their public statements. That’s just the latest episode of the regulatory saga around the social media giant. While no such risk has materialized so far, Facebook shares have been hurt by the bad headlines.
In a statement to Barron’s earlier this week, Facebook said, “Every day our teams have to balance protecting the right of billions of people to express themselves openly with the need to keep our platform a safe and positive place. […]To suggest we encourage bad content and do nothing is just not true.”
Apple is dealing with the ongoing supply-chain disruption and chips shortage. The smartphone giant will be in the spotlight Oct. 28, when its next earnings report is slated to be released. Apple is expected to reveal on that day how the new iPhone 13′s sales are going so far, and how Apple plans to create new growth opportunities leveraging its huge consumer base. Although analysts are expecting strong earnings for the past quarter, those gains are likely already priced in. It’s the longer-term future that investors will be looking at.
As for Amazon, there have been concerns about a broader slowdown in U.S. e-commerce spending growth, especially given tough year-ago period comparisons. Some investors are also worried whether Amazon has enough inventory to deliver products during the holiday season, if the current supply-chain disruptions continue into the end of the year.
Facebook and Amazon stocks currently trade at multiples lower than their five-year average, while Apple and Microsoft are more expensive than the historical average. Google shares are priced at roughly the same level.
The outlook for the Big Five tech stocks is important to the entire market, because they alone make up nearly 25% of the S&P 500. “If tech is facing headwinds, then the S&P 500 itself will have a hard time rallying simply because of the size of these companies and the impact of the tech sector,” wrote Tom Essaye of Sevens Report in a note last week.
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