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FAANG Fumbles: Is the Decline Temporary?

Ritujay Ghosh
Perhaps, investors have finally started doubting if tech stocks can sustain their rally amid growing concerns over rapidly rising interest rates.

On Oct 10, stocks nosedived, with tech companies at the helm of the carnage. The broader S&P 500 tech sector witnessed its worst day in seven years. The tech sector, particularly FAANG stocks, has been driving markets for some time. However, trade war fears have sent tech stocks on a roller-coaster rise for the past few months.

That said, concerns over rising interest rate and trade war are not the only reasons behind tech stocks taking a beating. While it’s too early to predict if the U.S. economy is heading toward a long-overdue recession, the meteoric rise of tech stocks were in line for a correction.

Perhaps, investors have finally started doubting if tech stocks can sustain their rally amid growing concerns over rapidly rising interest rates. Moreover, social media giants too have been suffering for a while, as concerns of a regulatory clampdown on how tech and Internet companies handle user data, has been looming large on a number of companies.

Worst Day for Tech Stocks in Years

Rising interest rates sparked fears of a slowdown in economy, leading to huge selloffs. The S&P 500 skidded 3.3%. However, it was the broader tech sector that led the rampage, declining 4.8%, its sharpest fall since Aug 18, 2011. And it was once again the FAANG stocks that suffered the most.  FAANG stocks, comprising Facebook, Inc. FB, Alphabet Inc. GOOGL, Apple Inc. AAPL, Netflix Inc. NFLX and Amazon.com, Inc. AMZN, plummeted as much as 4.1%, the biggest lost since late July.

On Oct 10, shares of Facebook, Google and Netflix declined 4.1%, 4.6% and 8.4%, respectively.  Although there are quite a few are macro factors like rising interest rates and bond yields behind this selloff, the correction was perhaps being anticipated for some time now. After Apple, Amazon last month became only the second publicly traded U.S. company to cross $1 trillion in market cap.

On Wednesday, Amazon plummeted more than 6.2%, pulling its market cap down to $856 billion and slashing Jeff Bezos’ personal wealth by $9 billion. It goes without saying that investors have investors have finally started doubting if the rally will continue amid robust earnings expectations and high consumer confidence, which has resulted in this correction. Apple has a Zacks Rank #2 (Buy), while Google, Netflix and Amazon each carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Trade War Fear, Regulatory Scrutiny Hit Tech Sector

Tech stocks, particularly the FAANG group, have been one of the major drivers of the markets long rally. However, despite being the third best performer on the S&P 500 index, tech stocks have had a rough 2018. And one of the major reasons behind this roller-coaster ride has been growing fears of trade war. This has seen tech stocks particularly, FAANG stocks and chipmakers taking a hit.

The escalating trade tensions between the United States and China has time and again made tech stocks bleed. Anticipation of higher tariffs, which are expected to impact tech stocks, have been making investors jittery.

Moreover, renewed concerns over user data privacy and security after breaches and vulnerabilities by the likes of Facebook and Google are also affecting tech companies. Facebook has been punished by investors time and again since it got embroiled in a data misuse scandal involving Cambridge Analytica.

Concerns of a regulatory clampdown on how tech and Internet companies handle user data, has been looming large on a number of companies. A regulatory clampdown means restricted use or ad-free paid service, which will weigh on the companies as they tend to lose users, who can’t afford pair service.

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