Why are Tech Stocks so Volatile – A Breakdown

Why are Tech Stocks so Volatile – A Breakdown

Tech stock volatility has become a key element of the financial market throughout the digital age, although the sector has avoided the type of crash that characterised the boom (and bust) at the turn of the century.

Certainly, the tech-led Nasdaq index has remained volatile throughout the coronavirus pandemic and beyond, while it endured one of its worst years in living memory in 2022.

But why exactly are big tech stocks like Amazon, Apple and Microsoft so volatile, and what does the future hold for this highly lucrative and changeable market niche.

A Look at Tech Stocks – The Prime Examples

The global tech sector comprises two primary types of asset, namely hardware and software companies.

Of course, there are considerable and notable crossovers in the modern age, but PC and semiconductor giants Intel offer a prime example of a large-scale hardware stock.

Stocks that deal primarily in software include Amazon, of course, while companies that tread the fine line between these two categories include Apple, Samsung and Microsoft.

These stocks regularly dominate indexes such as the Nasdaq 100, while it can be argued that their current share values continue to outstrip company earnings and profitability in the marketplace (we’ll touch more on this a little later in the piece).

So, why are Tech Stocks so Volatile?

The volatility of tech stocks can largely be attributed to the macroeconomy, and especially fluctuating interest and inflation Q1 2022, as Russia invaded Ukraine and central banks became increasingly hawkish when planning base rate rises.

Make no mistake; the current combination of double digit inflation (in the UK at least) and inflated base rates is damaging to companies, who are seeing demand for their products while the cost of borrowing increases.

This is especially challenging for tech stocks, who often sell premium and higher priced products while facing larger financial outlays.

Unsurprisingly, high-growth names and small-cap startups were among the hardest hit through 2022, while this trend is likely to continue through the formative part of 2023 at least.

Remember, tech sector earnings are traditionally slow and sluggish during Q1, with this likely to impact directly on stock valuations and bring these a little more in line with quarterly revenues. This is something to watch when buying into tech stocks or indices such as the Nasdaq 100 as part of your online trading portfolio.

What’s Next for the Tech Sector?

The good news is that inflation may have already peaked in the developed world, with energy prices depreciating in Europe and UK Prime Minister Rishi Sunak pledging to halve inflation to 5% by the end of the year.

This should bring the base interest rate down too, creating a more favourable macro climate for businesses and high value tech stocks.

Because of this, the future appears relatively bullish, particularly for in-demand software and semiconductor names such as Intel.

What’s more, the recent downturn in the tech market has created some attractive and disproportionately low entry points, helping you to potentially optimise your short and medium-term returns.