Can we expect a big comeback in tech stocks this year?

2022 was a very challenging year for the stock market. In this year, equities were under severe pressure mainly due to high inflation, and especially due to high interest rates. Since the beginning of this year, there has been a very optimistic mood on the markets, with markets rising along with technology stocks, which were hit hardest last year. But can we really expect a green wave from technology stocks this year?

Since the beginning of the year, the stock markets have acted almost as if we don't have any problems here. There is general optimism in the markets, and some investors are happy to finally see green numbers in their stocks for a change. But has enough changed to warrant such optimism? Personally, I think not. Why do I think that? Let's take a closer look, and break down a few points that lead me to this belief.

Inflation

Yes it is true that our inflation rate is indeed falling, which may give investors some hope and optimism. But we must not forget that inflation is behind the rise in the costs of these companies. In recent years, labour has become a major cost, with technology companies having to hire large numbers of workers in order to be able to sustain their growth at all.

But now the tables are turning, and many analysts don't see this year going well at all, and are expecting a recession. That means that companies have been spending money they had plenty of in previous years on their workforce because they assumed a certain growth plan, so they've miscalculated a bit. 2022 has shuffled their cards. Due to high inflation, the demand for these companies' services and products has dropped. Yes there are some companies that have not reported any major drop in demand, here these are companies with very strong brands.

In contrast to this problem, due to high inflation, these companies had to increase the wages of their employees. Everything had reached a point where the companies' costs were too high and they had to start looking for ways to save on these costs. As growth was no longer expected to be so high, companies resorted to laying off redundant staff in the second half of the year, as we have read practically everywhere. So, yes, companies are trying to save on costs, and to manage this difficult situation with clarity.

However, we must also be aware that inflation is nowhere near the target set by the US Federal Reserve. That means that we are not completely out of the woods yet. Personally, I think that, unless the US Federal Reserve and the government make some fundamental error in their policy, the downward trend in inflation could be maintained.

Fed policy

The second issue that we are going to face this year is the Fed's stance. The Fed has admittedly begun to reduce the pace of interest rate increases, which in turn is sparking hope and optimism among investors. On the other hand, Fed Chairman Jerome Powell has already confirmed that the Fed has no plans to cut interest rates this year. A miracle would therefore have to happen in the form of a sharp fall in inflation for the Fed to start cutting interest rates, which is not imminent at the moment.

What does interest rates have to do with technology companies? Quite simply, in recent years, these companies have invested heavily in their growth and expansion. A big driver of this investment has been very low interest rates, which at one point were close to zero. Today, however, the situation is reversed, and money is expensive, so to speak. This means that companies are paying high interest rates on loans. In some cases, it is even happening that these interest rates are being increased on loans that were taken out at a time of low interest rates.

This means that, in addition to staff costs, companies have also seen their debt servicing costs rise dramatically.

The situation now is that these companies are trying to postpone and minimise investments that are financed by debt. This has led to a slowdown in the growth of these companies, making them less attractive to investors because few of the technology companies pay dividends.

High valuations

In recent years, there has been a lot of activity around technology companies, which has driven valuations of these companies to absurd heights. The current situation, fraught with uncertainty, and with the prospect of a recession, has raised concerns among these investors. After all, you don't want to own companies with exorbitant valuations at a time like this. In short, investors were valuing these companies based on very positive future prospects. This year has completely changed everything, and investors have reassessed their view of the valuation of these companies.

A change in investor strategy

In times of uncertainty, and when a recession is looming, investors adapt to the current situation. Add to this the general trend of dividend paying stocks being the best defence against such a situation, and it is clear that many investors have started to look for such stocks.

This has led to a flight of capital from non-dividend-paying technology companies towards dividend-paying stocks. Because even if investors don't get any significant growth this year, they can still count on dividend income. This is another reason for last year's decline in technology company stock prices.

Disrupting supply chains

There have been disruptions to supply chains globally over the past year, for example as part of the war sanctions against Russia, or even because of the war itself, which have also contributed to price increases and inflation itself. This disruption of supply chains has also affected some technology companies. This was another blow to these companies, which have been falling over the past year. It may look like supply chains have started to stabilise, but of course the situation can change. After all, the war in Ukraine is still ongoing, and no one knows at this point how it will play out.

Conclusion

Above we have outlined several reasons why technology stocks have underperformed over the past year. When we think about it, most of these pressures are still not over, and at the moment it looks like these pressures will be with us for a while. In summary, inflation is still far from its target, this fact leaves the Fed in a position where they are determined that there will be no interest rate cuts this year. As a result of this situation, where we don't really know when these problems will end, there may of course continue to be investor sympathy for defensive dividend stocks. So this doesn't look like technology companies are going to get going again this year.

On the other hand, there are some technology companies that already look attractive to investors, especially from a valuation perspective. So I personally think that this year will not quite belong to technology stocks yet, but on the other hand, we are starting to see some pretty interesting investment opportunities.

WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.