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Why tech could struggle to make back this year's losses anytime soon

·3-min read

Tech stocks are taking a beating this year. The Nasdaq Composite (^IXIC) is still down 18% despite notching its best day since the pandemic lows — up 4%.

DocuSign (DOCU) sits nearly 80% in the red over the last year, and PayPal (PYPL) is off over 70%. These are just a few of the wipeouts facing investors in individuals' names in the sector.

This has been a difficult pill to swallow for investors cringing at the thought of cracking open their brokerage statement.

But the pain might not be over anytime soon.

"The reality is that we're still in a situation with high inflation, and with tighter monetary policy, which means higher discount rates," Liz Young, head of investment strategy at Sofi, said on the latest Yahoo Finance Plus webinar. "As long as those rates stay high, we have a headwind for tech — or at least a sort of a ceiling on those high growth stocks."

Fiscal and monetary largess has disproportionately benefitted the high-growth names dependent on low interest rates. These stocks have born the brunt of the decline in markets as the Federal Reserve moves to tamp down runaway inflation by raising interest rates.

At issue for tech investors are valuations that get more challenged as risk-free rates rise.

CHINA - 2022/07/25: In this photo illustration, the American online payment platform Paypal logo is displayed on a smartphone screen. (Photo Illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)
CHINA - 2022/07/25: In this photo illustration, the American online payment platform Paypal logo is displayed on a smartphone screen. (Photo Illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)

After a lofty jaunt in the stimulus-laden heavens, multiples are returning to earth. That is, the numerator in the price-to-earnings ratio has been sinking, as earnings remain flat — in limbo just under $200 per share for the S&P 500 (^GSPC).

And let's not get started with stocks valued on a price-to-sales ratio.

To get that "P/E" back up, prices must rise or earnings must fall. Which way this dam breaks may become clearer as we move into the heart of earnings season.

Still, it remains too early to tell and besides, P/E ratios don't pay the bills — only price pays.

However, rising rates and slowing growth have stoked recession fears, which have caused bond traders to start betting on future rate cuts.

Some measures of the bond market are pricing in Fed easing as early as the first quarter of 2023. Lower rates and easier monetary policy could be just what tech investors need to get back on track.

"The 10-year could still come down from here if there's recession fear in the economy," Young says. "That is a tailwind typically for those growth stocks."

Unfortunately, for battered investors aching to recoup tough losses, getting back to breakeven could take years, if ever.

All it takes is a quick look at some of the main players from the last two market blow-ups to see how dicey a return to record highs can really be.

Jared Blikre is a reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared.

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