Tech stocks led the market rally. Now they’re falling behind
3 min read . Updated: 24 Mar 2021, 04:32 PM IST A year after the US stock market’s coronavirus-induced selloff, investors are trying to assess what comes next
One year ago, the US stock market bottomed out, with the S&P 500 hitting its trough after a 34% plunge in just 23 trading days.
At the time, few could have imagined the recovery that the market has seen, including 34 record-highs for the index since last year’s low. Despite a global pandemic that has killed nearly 550,000 people in the US, eliminated millions of jobs and restricted economic activity, stock indexes have risen to new highs.
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Behind the stunning rally stand a series of factors, including, initially, the Federal Reserve’s swift emergency measures to support financial markets and the economy. Those helped push U stocks off their 2020 low and kicked off a stretch of sustained leadership by growth and technology stocks. As investors piled back into the stock market last year, they scooped up shares of companies that stood to benefit from the pandemic. Unlike sectors such as energy and retail, which suddenly faced uncertainty, technology stocks were lauded by some analysts as holding large growth potential.
Recently, however, that rally has stalled, sending the tech-heavy Nasdaq Composite briefly into a correction—a 10% decline from a recent high. Since the index’s recent record on Feb. 12, growth and tech stocks have largely struggled. In contrast, other sectors have surged, including energy and financials.
The following charts chronicle how the market has changed since Feb. 12.
Driving investors’ interest in technology and growth stocks last year was a belief that the Covid-19 pandemic had accelerated trends that many expect will persist. With more consumers working from home and shopping online, investors piled into shares including Zoom Video Communications Inc., Amazon.com Inc., Microsoft Corp. and PayPal Holdings Inc.
Meanwhile, some investors’ fear of missing out helped sustain growth stocks’ rise. Companies such as electric-vehicle makers Tesla Inc. and NIO Inc., as well as fuel-cell company Plug Power Inc., quickly became favorites, in part because of interest from more individual investors. All three stocks surged 840% or more from last year’s trough until Feb. 12. They have since retreated.
The recent pullback in tech and growth stocks comes amid mounting concerns about inflation, as both economic activity and Covid-19 vaccine distribution pick up. Government bond yields have climbed, with the yield on the benchmark 10-year Treasury note surpassing 1.7% for the first time in more than a year.
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Rising interest rates are particularly problematic for growth and technology companies, in part because their earnings are expected to come further in the future. Rising yields increase the value of current earnings relative to future ones.
Investors’ changing focus has helped fuel a rise in more economically sensitive companies that are expected to benefit, as the economy more fully reopens.
Since Feb. 12, the Russell 1000 Value Index, which measures the performance of large-cap value companies, has climbed 2.7%. Its growth counterpart, the Russell 1000 Growth Index, has fallen 5.3%.
On a year-to-date basis, the Russell 1000 Value Index is outperforming its growth peer by the widest margin since 2001, according to a Dow Jones Market Data analysis of the period ending March 23.
Among the sectors that have benefited the most from the recent rotation into value stocks: financials and energy companies. Of the S&P 500’s 11 groups, the two have posted the strongest performances since Feb. 12.
A rally in oil prices has lifted shares of energy companies, with investors expecting a continued pickup in demand. Financials, meanwhile, have benefited from rising bond yields, which could enable banks to charge more on loans.
This story has been published from a wire agency feed without modifications to the text.
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