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The End of Tech’s Financial Market Hegemony

El auge de las tecnológicas

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Available: Español

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The tech boom could be coming to an end, or at least that is the fear of many investors who are panicking as the present increasingly resembles the dot-com crisis of 2000 when Wall Street saw the massive disappearance of companies that failed to monetize their ambitious business promise within the Internet phenomenon.

Tech companies are usually referred to as companies whose business is the intensive use of consumer data to offer some kind of service through the web, whether it is a streaming channel, a social network, or an e-commerce store.

So far this year, the S&P500 stock index, which groups the 500 largest companies in the United States, has fallen by 19%. Among the companies that carry the most weight in the index’s valuation are technology giants such as Amazon, Netflix, Facebook, and Tesla.

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For years, the shares of technology companies have played a leading role in the course of the U.S. economy and, naturally, in the stock market indexes. Companies like Facebook went from being simple university start-ups to multinationals with millions of dollars in revenues per year.

In the same period of time, Amazon consolidated its position as the main e-commerce channel for Americans, followed by companies such as Ebay or Alibaba. Meanwhile, a simple Internet search engine known as Google became a giant in the data economy.

Technology companies had an unprecedented growth in their market valuation during the pandemic. (EFE)

The pandemic was the boom period for technology companies in the financial markets, the share price of these companies began to rise in value due to the massive monetary stimulus of the Federal Reserve (FED) and the Government, along with record sales resulting from millions of Americans who could not leave their homes and with a lot of savings.

Soon the so-called FAANGs (Facebook, Apple, Amazon, Netflix and Google) began to set the pace at which the stock market indexes in the United States fluctuated. At times, these companies were solely responsible for the stock indexes remaining positive.

Is the tech boom in the U.S. economy coming to an end?

Today, investors do not feel the same optimism as in the previous decade and some have returned to investing in more “traditional” companies that prioritize cash flow over companies with large investments in technology but uncertain profitability.

According to The Wall Street Journal, more than $48 billion has flowed out of funds that invest in high-growth stocks (such as the FAANGs), while more than $13 billion has flowed into funds that invest in value stocks, i.e., investing in companies that have a competitive operation, but are apparently undervalued by the market.

The money that used to go into shares of companies like Facebook or Netflix is now going into companies like Exxon Mobil or Coca-Cola, with less ambitious future promises, but with more certain and tangible returns for investors.

Some investors fear that the market will repeat the dot-com crash, when the Nasdaq index — which tracks the pulse of major technology companies in the United States — lost 80% of its value between March 2000 and October 2002.

Cryptocurrencies are also falling fast

It’s not just the big companies that are suffering a precipitous fall on the stock market, so are Start-ups. Cryptocurrency broker Coinbase has lost up to half of its market value so far in 2022.

Cryptocurrencies are also suffering from the run on financial markets; Bitcoin dropped below $30,000 in May. A year earlier, some analysts were predicting it had the potential to surpass $100,000.

Investors sell Facebook and Netflix shares to buy Coca-Cola and Exxon ones (EFE).

Cryptocurrency markets are in complete turmoil and have lost as much as $600 billion in value in one week. Even the so-called Stablecoins, which in theory are cryptocurrencies that guarantee a fixed value, have had sudden drops in price, causing an outflow of small investors rushing to get out of digital assets.

The pessimistic market, facing the economic outlook

Investors are worried about expectations of an upcoming interest rate hike by the Fed, which limits the money supply and encourages a decrease in consumption with the rising cost of credit.

This not only translates into lower sales for companies, but also a higher cost of leverage, which limits the amount of capital companies have to invest in their operations.

While techs may be losing their prominence in the market, recent declines in the indexes can also be explained by the increasing likelihood that the economy is in the midst of a recession.

In the first quarter of 2022, the U.S. economy recorded negative growth of -1.4%, although this does not necessarily mean that the economy is entering a recession, negative growth indicators also do not represent a good sign for the markets in the future, which remain pessimistic.

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