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Tech stocks are in the midst of their worst selloff in years. Turmoil in the money market could further exacerbate the damage.
Big tech companies generate 58% of their revenue outside the U.S. — the most of any 11 groups in the S&P 500, according to FactSet. That makes them particularly vulnerable to falls from a rising dollar. As the dollar strengthens, companies’ sales in non-dollar currencies are less valuable. This can shave millions of dollars off the company’s revenue.
Microsoft Corporation
MSFT 3.37%
In July, it reported the slowest earnings growth since 2020, warning that it believed the stronger dollar would shave five percentage points off earnings growth for the next quarter. Google Parent Alphabet Inc.
GOOG 3.28%
and Facebook META 2.16%
Parent Meta Platforms Inc. They also said that currency fluctuations could affect their results in the coming earnings season.
All three companies are expected to report quarterly results later this month.
“If we think about the list of things that went wrong in technology this year, [the dollar] said Denny Fish, portfolio manager at Janus Henderson Investors, who manages the global technology and innovation strategy.
Tech stocks jumped along with the broader market on Monday, but were down sharply for the year. The tech-heavy Nasdaq Composite fell 32 percent year-to-date through Friday and suffered its worst first nine-month slump since 2002, according to Dow Jones market data. The Nasdaq has fallen for three straight quarters, its longest losing streak dating back to March 2009.
“We’ve had inflation, we’ve had inflation, everybody’s expecting the economy to slow down materially and now we have this currency headwind,” Mr Fish said.
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In the past, investors have sometimes been willing to look past currency markets because other factors, like a growing economy, have helped offset the drag from a strong dollar. For example, the dollar rose in 2014 after investors bet the Federal Reserve will soon start raising interest rates for the first time since the global financial crisis. US stocks, however, ended the year higher. The reason the dollar is rising is because the U.S. economy — unlike the economies of the Eurozone and Japan — is strong enough for the Fed to consider raising rates near zero. A strong economy typically produces good corporate profits.
What makes this year special is that the U.S. dollar is rising at a time when economists widely expect growth to slow materially — both domestically and abroad. The next 12 months was 49%. This was the highest proportion since the depth of the Covid-19 pandemic in July 2020.
The pace and magnitude of the dollar’s gains this year have exacerbated investors’ woes.
The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, was up 16 percent through Friday.
Historically, every 8 to 10 percent gain in the dollar has shaved about 1 percent against other currencies, said Jonathan Golub, U.S. equity strategist and head of quantitative research at Credit Suisse.
Nicholas Collas, founder of DataTrek Research, said the combination of sluggish growth, interest rates and a rising dollar explain why many tech stocks have fallen to multiyear lows in the past few months.
Microsoft and chip maker Nvidia Corporation
Both were trading at their lowest levels since March 2021 on Friday, with Alphabet at its lowest since February 2021 and Meta at its lowest since early 2019.
“It’s all hitting the fan at once,” Mr Collas said.
The dollar is getting stronger. Although this may sound like a happy thing, a rising dollar can spin the economy in unexpected ways. The WSJ’s Julia-Ambra Verlaine explains. Example: Jordan Kranse
Write to Akane Otani at Akane.otani@wsj.com
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