The brief record rally this month in shares of unprofitable and highly valued technology companies is starting to look like a short-lived blip amid a steady drumbeat of hawkish commentary from Federal Reserve officials.
A basket of money-losing tech stocks compiled by Goldman Sachs Group Inc. jumped 15% on Nov. 10 after a report showed US consumer-price inflation cooled in October more than forecast. The news led to speculation the Fed had room to slow its pace of interest-rate increases.
Investors tried to keep pushing the stocks higher: A similarly positive report on producer prices led to a smaller pop last week. But the index has since faltered, leaving it below where it closed on Nov. 10. It fell 2.5% on Friday, a session when the Nasdaq 100 Index finished unchanged.
While rising rates have hammered tech stocks broadly this year, riskier companies have been hit especially hard. It’s a dramatic reversal from the steady climb they enjoyed during the pandemic, when economic stimulus and the Fed’s easy-money policies spurred a flurry of speculative buying.
“There are people who will buy almost anything on any sign of good news, and a ‘dash for trash,’ where people jump into junky or unprofitable stocks, is a classic thing to see on days like that,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab Corp. “While it’s never a great idea to be in low-quality names, these look especially risky now as the conditions for speculation have reversed.”
The Goldman basket is down 61% this year, while the Nasdaq 100 is down 28%. Among notable names, C3.ai Inc. is down 59%, SentinelOne Inc. has dropped 67%, and Asana Inc., Okta Inc., and UiPath Inc. have all collapsed more than 70%. Even after their declines, all trade at a premium to the Nasdaq 100 in terms of price to estimated sales.
Higher rates hurt shares of unprofitable and high-valuation growth companies the most, because their shares are priced on their prospects far out in the future, with bond yields used to discount into today’s dollars the value of earnings that companies may not see for years. Inflation, along with the Fed’s attempt to combat it by aggressively raising rates, has led to Treasury yields jumping from 1.5% at the start of the year to 3.8%, and recently hitting their highest since 2008.
In the latest sign the Fed may not be about to reverse course, St. Louis Fed President James Bullard last week said the US central bank should raise interest rates to at least 5% to 5.25% to combat inflation, well above the current 3.75% to 4%.
The comments followed a similar statement from San Francisco Fed President Mary Daly. Governor Christopher Waller expressed openness to the Fed raising rates by half a percentage point next month, less than recent increases of 0.75 point, but he downplayed the significance of the CPI report.
“I cannot emphasize enough that one report does not make a trend,” he said. “It is way too early to conclude that inflation is headed sustainably down.”