Top Challenges Threatening Tech Stocks in Today's Market
Tech stocks have surged impressively this year but face significant political and economic challenges that could trigger another sharp decline.
The technology sector is currently navigating critical challenges such as increased regulation and a slowing economy.
After rebounding strongly from last year's downturn, tech stocks have surged by an impressive 20%. However, unlike previous recoveries, this rally faces unique threats that could cause a sharper decline than the 2018 correction, which many tech companies have yet to fully recover from. Key risks include a potential drop in earnings due to economic deceleration, ongoing US-China trade conflicts, and intensified regulatory scrutiny including possible breakups of major tech corporations.
Industry giants like Nvidia Corp. (NVDA), Intel Corp. (INTC), Apple Inc. (AAPL), Facebook Inc. (FB), Alphabet Inc. (GOOG), and Amazon.com Inc. (AMZN) are expected to encounter significant obstacles over the coming year. Richard Bernstein, founder and CEO of Richard Bernstein Advisors, told the Financial Times, “This sector is deeply cyclical but often mistaken for pure growth.”
Tech Stocks Are Leading the Market Again—But For How Long?
- Technology Select Sector SPDR Fund: +20%
- S&P 500: +13%
Source: CNN Money, Year-to-Date performance as of 10:30 AM EST on 03/22.
Implications for Investors
Bernstein highlights that tech companies are especially sensitive during periods of weak earnings growth. Goldman Sachs' recent data projects a -2% earnings per share (EPS) growth for the information technology sector in 2019, the lowest among all sectors. “If earnings slow down in 2019 and 2020, leading to a profit recession, this sector will not be immune,” Bernstein warned.
The ongoing US-China trade war continues to cloud earnings prospects. Apple’s shares dropped last year amid weak smartphone demand in China, although hopes for a trade agreement sparked a recovery. With no deal reached yet, concerns are rising about a potential technology “Cold War” between the two largest economies, driven by China’s dominance in the ICT supply chain.
Paul Triolo, head of geo-technology at Eurasia Group, explained to Barron’s, “If infrastructure built by China is compromised during conflict, they could theoretically disrupt operations instantly. After decades of supply chain optimization and offshoring, security concerns are now forcing a rethink.”
Regulatory risks also loom large. Democratic presidential candidate Elizabeth Warren has made breaking up major tech firms a campaign priority, signaling that tech regulation will be a major policy focus ahead of the election. Lee Spelman, head of U.S. equities at JPMorgan Asset Management, told the Financial Times, “Breaking up big tech could have significant consequences, depending on the approach taken.”
Future Outlook
While the tech sector remains a favorite among investors with vast potential for automation and machine learning advancements, it faces a series of economic and political challenges in the near term that could impact performance.
If you have news tips for Investopedia reporters, please email tips@investopedia.com.
Discover engaging topics and analytical content in Markets News as of 27-03-2019. The article titled " Top Challenges Threatening Tech Stocks in Today's Market " provides new insights and practical guidance in the Markets News field. Each topic is meticulously analyzed to deliver actionable information to readers.
The topic " Top Challenges Threatening Tech Stocks in Today's Market " helps you make smarter decisions within the Markets News category. All topics on our website are unique and offer valuable content for our audience.