Commentary: Is Meta stock plunge a sign the tech bubble will burst soon?
LONDON: Heavy-hitting tech stocks have marched investors all the way to the top of a very big hill. Are they about to lead them back down again?
For years, those of a more nervous disposition have been concerned by the outsized role Big Tech plays in United States stock markets. Together, the 10 biggest stocks, mostly tech-flavoured, account for about a third of the entire market capitalisation of the S&P 500 index.
That is far above the concentration observed in the previous tech bubble peak of 2000.
So, the bear case goes, if they hit a bump, they could topple the rest of the market with them. Even the most optimistic of fund managers have had this in the back of their minds since well before the pandemic struck.
It has not mattered. Until now.
Meta – known as Facebook before chief executive Mark Zuckerberg decided very normal humans would enjoy communing with their very normal human friends in the form of 1990s-style avatars – this week delivered a humdinger of a warning on its outlook, sending its stock, and the broader market, reeling.
vanished from the company’s market capitalisation when shares fell 26 per cent after Zuckerberg acknowledged he was feeling the pinch from the competition.
The value destruction is roughly equivalent to the , or more than one McDonald’s, and was enough to produce the worst day for the overall S&P 500 index of US stocks in more than a year. It is the biggest drop in absolute terms in a US company’s market value ever. You get the idea.
Pretty much all sensible investors knew 2022 would be a rougher ride than 2021, now that big central banks are preparing to withdraw the support they pumped into the financial system when COVID-19 struck. But few saw this coming.
CAUTIONARY TALE OF THE ‘ZUCK SHOCK’
Move over, the “spec tech wreck” from January, when the largely unprofitable end of the tech sector took a drubbing. That wobble was just starting to heal.
Now we have a “Zuck shock” biting into what has been the bedrock of the market.
Size, of course, matters in this respect. “When these companies have market caps of US$300 billion to US$1 trillion and they fall 25 per cent, this causes a lot of pain,” said David Older, head of equities at Carmignac.
The backdrop also matters. Since December 2021, it has been very clear that the US Federal Reserve has changed its mind. It really does intend to jack up interest rates to douse down an uncomfortable rise in inflation, and it will not mechanically or quickly step in if markets puke in response.
This severely compromises the froth that has built up in financial markets.
Much of the gains in tech stocks have not just been down to the profitability of the sector but also the fruit of widespread speculation and the vast flows of money into stock markets. This has driven up valuation multiples for companies.
That means a lot of fund managers who think they have made shrewd bets on the future of the global economy are actually, at least in part, momentum riders like everyone else.
“A lot of what we have seen in terms of the rally in tech stocks is multiples expansion,” said Older. “Nobody wants to say it because everybody thinks they are a genius, including me. But it is."
Martin, K. (2022, February 7). Commentary: Is Meta stock plunge a sign the tech bubble will burst soon? CNA. https://www.channelnewsasia.com/commentary/meta-stock-value-fall-mark-zuckerberg-invest-tech-bubble-2483916