The world's biggest tech companies lost more than $1 trillion in value over the last three trading days, with companies like Amazon, Apple, Meta and Uber leading the losses.
The broader tech sell-off comes after the Federal Reserve announced plans to hike interest rates in an attempt to cool inflation. Scott Ladner, CIO, Horizon Investments joined Cheddar's Opening Bell to discuss.


Opening Bell

Tech Giants Lost $1 Trillion in Value As Sell-Off Continues

let's bring in scott Ladner, chief investment officer, horizon investments for his take on this. Why are investors avoiding and clearly given the last couple of sessions selling off tech stocks during this market decline in turbulence. I mean, what exactly do you think is going on here? It is a truly warranted to the impact that we're seeing, Hey, good morning and thanks thanks for having me Alicia. Um, look, yes, to some extent, this is somewhat warranted because a lot of the stocks that are, that are getting hammered right now are, are the exact same ones that actually flew during, during the, during the covid pandemic times. Um, and the reason why some of these stocks were really high flyers was because we had incredibly low interest rates and incredibly easy financial conditions, um, that, that is a recipe for, you know, for kind of long duration equities or equities that really need, um, you know, required that you look at a very long time to get earnings. Um, you know, that's that type of, that type of, you know, the loose financial conditions market is one where those can really fly the better right now though, is actually just pivoted. And they said, listen, we have to get tighter financial conditions in order to rein in demand and get inflation under control. And so that, that, you know, in order to get financial conditions tighter there, obviously raising rates, making credit less less available. And those same things that, that actually brought those stocks up the same things that are leading them down. And so we're probably closer to the end of the carnage, frankly than than than the beginning. Um, but, but there is a pretty, you know, pretty sound rationale for why those stocks are really getting hammered the way they are. How long do you expect this downturn to last? I mean the reality is this interest rate environment is expected to last for quite a while given that the Fed has to continue to kind of raise interest rates to hopefully get inflation, you know, under control. There are still questions lingering on whether it actually do that. So with that picture kind of set in stone, so to speak, for the moment, how long do we he was downturn with tech probably for another, another, you know, one or three months would be our best guess. Uh, you know, this is, we think broadly speaking, this is probably a violently going nowhere type of market for the next few months. Um, you know, the Fed put, is there somewhere, it's probably in like the 3500, 3600 level of, of SNP, so you know, down 10% or so from here is where they probably start getting far more concerned about about how quickly financial conditions are tightening and really, really, really start to get more concerned about growth prospects. But until, or unless we see some of that stuff, you know, with the Fed is going to continue to tighten financial conditions and, and, and really, you know, and raise rates pretty, pretty aggressively and do quantitative tightening and all the things that they think they need to do in order to get the inflation problem under control. Uh And so you know, until we get some inflation prints start to tick down on a month over month basis. As you know, if we get, you know that tomorrow we get C. P. I. The day after that we get PP. I. If we start to see some of these some of these headline inflation numbers start to miss um to the downside. Um that will give the Feds some cover to start loosening some of their language that's really what's gonna be required in order to get a meaningful boost inequities. So we, you know, we think we're probably in a trading range here, 3600, 3700 of the downside, probably 4500 to the upside and smp and that's a really really wide range obviously, but but it's but it's you know, it's wide for reasons why because the market is still digesting what we think not only the Fed, but other central banks around the world are going to do in order to quell inflation in the meantime, some of these high flying tech names that have really been on a tear for the better part of the last decade or so are having to operate in a really unique way in a way we haven't seen them operate over the last again, decade or so when you got names like Uber and meta, they're announcing, plans to cut back hiring and really get tight on the bottom line because to your point there, the appetite for a growth stock and a tech stock right now just isn't out there. What do you think these hiring freezes and these measures that these tech companies are having to take signal about the tech industry right now and, and, and its future growth prospects? Well, it's certainly, and probably things got a little too loose. Um, you know, things always get a little bit too loose when, when times are really, really good. You know, we're seeing that, you know, in terms of like stock compensation for instance, so, you know, a lot of these firms that don't make any money, reward their pay their employees with stock or stock options. That's a really, really good policy when things are going well. Um, but that things that tends tends to turn a little bit sour when, when, when stock prices start going back down because employees don't want to get paid with something that's, that's, you know, fairly worthless. Uh, and so, you know, we're going to see some of this, you know, some of this play out and, and probably some of the stock compensation get turned into cash compensation. We see some operating models have to get changed so that people, you know, so these companies start to actually generate some cash, which is what investors are gonna be demanding here for the next, the next little bit, but it's gonna be a cycle and it's gonna be a little bit of a process. And, you know, we will see some winners and some losers out of this, the ones that emerge that, you know, the company that emerged out of this being strong and being able to generate cash flow when the, when the market requires, it are going to be end up in a far more, far stronger position than they otherwise would have. So this kind of financial discipline that's going to be brought upon, these companies will end up being helpful in a sort of Darwinian way is the financial discipline though, a point of concern. Perhaps if you are looking at a meta and you're looking at a company to innovate into what's going to be the metaverse, right? I mean, the company changes entire name. Two meta obviously trying to usher in that era, yet it's cutting back and I wonder does that way on the potential for innovation with this company, if it has to get tight amid this market environment. You know, I I don't know that it's really a specific concern for medical medicine. They have tons of cash. Um, so, you know, for the, for the large tech companies, this is probably a little bit, a little bit of a shift in the way they have to operate, but it's not going to meaningfully change the way they do their business meta still has plenty of cash to operate, plenty of cash to play to pay employees plenty of cash to fund innovation. So I'm not really worried about them, you know, the amazons, the googles that met us, You know, like those companies are big enough with enough cash flow to really get through this without, you know, without too much skating, the, you know, the ones that are gonna be a lot more challenging are the ones that really don't generate cash flow. So the non profitable tech firms that, those are the ones that we really have to be more concerned about, you know, there are some of those that are, that are going to go to zero, just like there were 22 years ago and you know, when the NASDAQ bubble burst last time. Um, and so, you know, those are the ones that really have to be concerned about first, funny innovation, you know, the big shops have, have plenty of money for that really quickly. I just want to point out, obviously we're seeing the broader pullback in tech, but not all companies fully pulling back and not all companies really have the same concerns, right? There's a bit of throwing the baby out with the Bathwater happening here. Can you talk about the positive points in tech right now, what companies are actually doing well buying opportunity, you know, actually the mega cap one is broadly and large, like they are actually probably buying opportunity here and there are there still trading at a premium to the market in terms of in terms of valuation multiples. But they should, you know, they grow faster than than the rest of the economy and frankly they're able to grow even, you know, kind of no matter what is happening in the global economy. So at some point here in the, in the near future, as the concern from the market turns from one of being primarily inflation based to being primarily growth based, uh, you were gonna want to turn more towards those companies that can grow in any environment and those includes that, you know, that includes really those mega cap tech names. So we don't think we're that far away from from really wanting to fully embrace tech again, but really that the line of demarcation we've got to look at for when, for timing that decision is when is the like detecting when the market starts caring about growth more than it cares about inflation scott really appreciate inside we're coming up against the best we have to leave it there, scott, Ladner, chief investment officer at Horizon investments