- Tech stocks up with interest rate pivot.
- Rising rates problematic for tech's borrowing-based growth.
- Higher rates impact tech investments and product affordability.
Tech stocks have experienced a resurgence this year as investors prepare for the central bank's pivot away from high interest rates and towards a pause or cut. This shift is crucial for tech companies, which are usually growth-oriented and depend on borrowing money to fuel their growth. When interest rates are low, it becomes more affordable for tech companies to borrow money and incentivizes investors who are seeking high returns to invest in growth stocks.
However, the rise in interest rates that began in 2022 due to the pandemic and inflation has affected tech stocks as it reduced their valuations even when their fundamentals improved. This is because high interest rates also hinder venture capital, private equity, and credit investments, which stops America's innovation engine. In 2022, the tech-heavy Nasdaq 100 index suffered its worst annual performance since the financial crisis, falling 32%.
The correlation between interest rates and tech stocks is clear, with low rates being good for tech and higher rates being good for energy. Veteran tech investor Paul Meeks, portfolio manager at Independent Solutions Wealth Management, explains that higher rates must be discounted in the cash flow models used to value tech and aggressive growth stocks. He also notes that low rates in the past decade led to a surge in private-market valuations as investors poured money into startups, which has now reversed.
This week, major tech companies, including Amazon, Alphabet, and Apple, will announce their quarterly results and investors will be looking for their views on how interest rates have affected their plans for future growth. On Tesla's earnings call last week, CEO Elon Musk highlighted how rising interest rates had a significant impact on the affordability of his vehicles, effectively increasing the price by nearly 10%.
In conclusion, the central bank's pivot away from high interest rates is crucial for tech stocks, which are highly dependent on borrowing money to fuel their growth. Low interest rates make borrowing more affordable and incentivize investors to invest in growth stocks, but high interest rates reduce tech stocks' valuations and hinder innovation. Investors will be closely monitoring the impact of interest rates on tech companies' plans for future growth when they announce their quarterly results this week.