Why the Fed's pivot on inflation is hitting certain tech stocks so hard, while helping Apple

Published Wed, Dec 15 20219:18 AM EST

The "Powell Pivot" is causing big moves in tech valuations. Since Federal Reserve Chairman Jerome Powell indicated on Nov. 30 that the central bank would stop characterizing higher inflation as "transitory," tech has had trouble advancing — particularly software stocks, which are down roughly 10%. Semiconductors are down 5%. Cathie Wood's Ark Innovation ETF is down 14%. Why? Stocks that have high expectations for growth in earnings and cash flow (typically technology stocks) get hit because higher rates from bonds compete with stocks. Bonds are risk-free, so if bond yields go up, they make higher-risk assets less attractive. Some tech investors have fled into Apple , which is up 8% since Nov. 30 and has become something of a "safe haven" for those who want to flee the riskier (less profitable) parts of tech but still remain in the sector. The Fed's aggressive about-face is calling into questions sky-high valuations on many tech names. On Tuesday, JPMorgan software analyst Sterling Auty reduced his ratings on Adobe and other software stocks, noting that growth rates were the No. 1 determinant of valuations. "This has been consistent since 2000 and brings into focus whether growth rates can sustain or moderate at a tolerable level to keep valuations propped up," he wrote in a note to clients. Auty went further, implying that the IPO tsunami was making it difficult to monitor the market. He noted that there were 68 software IPOs and 26 software SPACs in 2021. He now monitors 263 companies. "A challenging part is the trading patterns we saw in a number of IPOs this year that advanced out of the gate but then faded, as we witnessed investors using these recent IPOs as funding sources to buy the next IPO," Auty said. This giant pool of money constantly changing hands creates opportunity, Auty said. "We think this is creating a bit of an orphaned stock phenomenon that, for the right investor, can mean picking up quality assets at a discount to where they were trading shortly post IPO." More tech re-evaluations coming? There's a strong chance that Auty won't be the last one to make a valuation call. Other tech analysts and strategists are also nervous. Bank of America analyst Justin Post noted Wednesday morning that his internet stock universe was down 13% in 2021 after a strong 2020. "Our BofA strategy team has a somewhat bearish view on the S & P returns in 2022 given high valuations and potential impact of higher interest rates and we expect a choppy 2022," he wrote in a note to clients. His main hope for a stronger 2022: Valuations have already begun to adjust.

Federal Reserve Chair Jerome Powell testifies before a Senate Banking Committee hearing on the CARES Act Oversight at the Senate Office Building on Tuesday, Nov. 30, 2021 in Washington, DC.

Kent Nishimura | Los Angeles Times | Getty Images

The "Powell Pivot" is causing big moves in tech valuations.