5 things weighing on the tech sector right now — and why there could be ‘more pain to come’

  • The technology sector's recent slump may not be over, according to analysts.
  • Regulatory concerns and ongoing fears of protectionism continue to weigh on the sector.
A trader rubs his face while working on the floor of the New York Stock Exchange in New York City.
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A trader rubs his face while working on the floor of the New York Stock Exchange in New York City.

A sell-off in technology stocks put pressure on global stocks this week — and the sector's recent slump may not be over.

The Nasdaq composite closed 0.8 percent lower Wednesday, dragged down by Amazon, Netflix and Apple. The sector pared some losses early Thursday, but some analysts remain skeptical.

"I think there's more pain to come," Patrick Armstrong, managing partner at Plurimi Investment Managers, told CNBC Thursday. Armstrong questioned fundamentals in the sector and said he was more positive on European stocks due to continued accommodative monetary policy on the continent.

Armstrong isn't alone in questioning whether the tech sector has had its day. Here's why some traders are still wary.

Trump 'obsessed' with Amazon

Amazon lost more than $31 billion of its market value on Wednesday after a report said President Donald Trump is "obsessed" with the firm and wants to "go after" it.

The report by Axios, citing unnamed sources, said that Trump has spoken of altering Amazon's favorable tax treatment due to concerns of the e-commerce giant putting retailers out of business.

White House Press Secretary Sarah Sanders said there were "no specific policies or actions" on Amazon being pushed forward.

One analyst said on Thursday that fears of Trump clamping down on Amazon and enforcing tighter regulation on internet giants were overblown.

But worries of the White House coming down on Amazon and other big tech firms continue to scare investors.

President Trump said in a tweet Thursday that Amazon, unlike other firms, "pay little or no taxes to state and local governments use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!"

Consumer 'techlash'

Facebook's stock saw sharp declines this month due to the fallout from the data sharing scandal engulfing the social media giant.

The company has been hit by negative headlines since a number of media publications reported that the data of millions of users were improperly harvested by controversial political analytics firm Cambridge Analytica.

Cambridge Analytica is accused of obtaining the data of 50 million Facebook users via a quiz app without their permission. The company's former boss, Alexander Nix, was secretly filmed saying that Cambridge Analytica ran Trump's presidential campaign.

The scandal has led to momentum on social media for users to delete Facebook. Fears of advertisers pulling from the social media platform have also heightened, with the likes of Mozilla and Commerzbank pulling ads. Billionaire entrepreneur Elon Musk also deleted the Facebook pages of Tesla and SpaceX last week, while Playboy on Wednesday deactivated all of its Facebook accounts.

Regulation

One theme that could continue to weigh on the sector for months to come is regulation.

Though talk of regulation has mostly focused on Facebook, the social network's data crisis could spill over to other big tech companies.

On Monday, Senate Judiciary Chairman Chuck Grassley called on Facebook's Mark Zuckerberg to testify at a hearing — he also called on Google CEO Sundar Pichai and Twitter CEO Jack Dorsey.

And U.K. lawmakers "may well" call on other big tech firms to give evidence related to Facebook scandal, Damian Collins, chair of Britain's Digital, Culture, Media and Sport select committee, told CNBC Wednesday.

Oliver Jones, markets economist at Capital Economics, said that regulation and protectionism were the two big factors causing the tech sector's recent under-performance.

"It is hard to say which factor will prove more damaging. But overall, our sense is that the operating environment for IT firms is going to get tougher," Jones said.

"So even if the price that investors are paying for their earnings is not excessive, share prices may remain under pressure as earnings themselves are squeezed."

Trade war

Trump's decision to slap up to $60 billion in tariffs on some Chinese goods last week was met with a retaliatory warning from Beijing of levies of up to $3 billion on U.S. imports.

A report Monday said that Beijing and Washington had begun to quietly negotiate U.S. access to Chinese markets, putting concerns of a full-blown trade war at ease.

Though talk of an all-out global trade war has dampened, some analysts still believe that protectionism is a cause for concern — especially when it comes to tech.

"We felt that the recent smoothing in trade war discussions felt too quick and too easy to take at face value," Neil Campling, co-head of global thematic group at Mirabaud Securities, said in a research note Thursday.

"China does have to play the game in technology to an extent because they still import more silicon semiconductors than oil and it will take years until they can be fully self-sufficient on semiconductors."

Campling said fears of the U.S. blocking Chinese investments in tech companies showed no sign of going away yet.

At the start of the year, the U.S. administration blocked Alibaba-owned Ant Financial from buying U.S. money transfer giant MoneyGram. Earlier this month, Trump killed a highly anticipated deal that would have seen Broadcom buy Qualcomm.

Lack of fundamentals

Some analysts have also suggested that tech stocks lack the fundamentals to justify high valuations.

In particular, some question whether the year-to-date bullish performance of FANG (Facebook, Amazon, Netflix and Google) stocks can last.

"I've been very suspicious of the rally this year in the tech sector and particularly in the FANG stocks," Mati Greenspan, senior market analyst at eToro, told CNBC in an email.

"It seems that there's been a rush of traders buying these equities simply because they're moving in a particular direction and without excessive thought about how much they really should be worth."

Greenspan added: "That dynamic starts to break down as volatility increases. Once traders begin to question the direction we may see many of them simply abandon their positions."

Plurimi's Armstrong was particularly skeptical about Tesla due to production issues surrounding the firm's vehicles and its bond pricesplummeting to their lowest levels since first being issued.

Armstrong said that "charismatic CEO" Elon Musk had driven Tesla's stock price in the past.

"But fundamentally a company that makes no earnings, negative cash, it sells cars below a price what it produces them for," he said. "Those aren't the companies I want to be attracted to."