The S&P 500 has shed over 3% in early trading, the Nasdaq Composite plummeting by nearly 5% as a brutal sell-off in Big Tech sends shockwaves through global markets. The so-called ‘Magnificent Seven’ are no longer magnificent but are dragging the entire edifice down. Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta have collectively lost over half a trillion dollars in market capitalisation since the opening bell. This is not simply a wobble; this is a tremor that threatens to become a full-scale seismic event.
Let us be clear about what is happening. The market is finally pricing in the risk that had been papered over by cheap money for too long. The Bank of England’s rate hike last week, coupled with the Federal Reserve’s insistence that rates will remain higher for longer, has punctured the valuation bubble that was inflated by near-zero interest rates. When the cost of capital rises, the multiples on future earnings collapse. This is basic finance, not a mystery.
The trigger? A confluence of factors. Earnings reports from the tech titans have been underwhelming. Amazon’s cloud revenue miss and Apple’s warning about supply chain disruptions are merely the catalysts. The real issue is that the market is waking up to the fact that these companies are not immune to the macroeconomic headwinds of inflation, rising input costs, and slowing consumer demand. The era of ‘growth at any cost’ is ending.
Gilt yields are spiking in sympathy. The 10-year US Treasury yield is now flirting with 5%, a level not seen since 2007. This is a double whammy for equities: higher risk-free rates make bonds more attractive, and they also increase the discount rate applied to future cash flows. The FTSE 100 is down 2%, dragged lower by the sell-off in US-listed tech stocks, but London’s more value-oriented composition offers some buffer. However, do not mistake this for insulation. Capital is flighty, and when the US sneezes, the rest of the world catches a cold.
What should the prudent investor do? First, do not panic. This is a correction, not a crash. The economy is still growing, albeit at a slower pace. Second, look at the fundamentals. There are bargains to be had in sectors that were oversold. Energy and commodities, for instance, have pricing power that tech lacks. Third, and most importantly, pay attention to central bank policy. The Bank of England and the Fed are caught between a rock and a hard place: they must tame inflation without breaking the economy. The market is betting they will choose inflation, but that bet is uncertain.
The fiscal profligacy of governments is a key part of this story. The UK’s unfunded tax cuts, the US’s Inflation Reduction Act spending, all of it has kept demand artificially high. Now the bill is coming due. The market is the ultimate arbiter, and it is saying that the party is over.
In the coming days, we will see if this rout deepens or if bargain hunters step in. My hunch is that volatility will persist. The era of easy money has ended, and the hangover will be prolonged. Keep your eye on the gilt yields; they are the canary in the coal mine. As for the government, they would do well to remember that markets do not forgive profligacy. The bottom line is the only line that matters.
