Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

ALONG with the ongoing war in Ukraine, roaring inflation and rising interest rates have upset a large number of investment apple carts so far this year. US shares moved lower again yesterday after quarterly results from the US general retailing giant Target highlighted the effects of rising input costs on profits.

Target cited higher fuel costs as well as supply chain problems as being behind a sharp fall in profitability1.

Up until recently, highly rated technology stocks have tumbled at the feet of more economically sensitive shares. The technology-heavy NASDAQ Index is down about 27% year to date, compared with the considerably more modest decline of around 13% recorded by the old economy stocks of the Dow Jones Industrial Average2.

The market’s response to Target’s experience – which chimes with the concerns registered by Walmart in its results earlier this week – argues in favour of at least some redressing of this balance.

Technology companies, which are famously “capital light” are also relatively insulated from rising commodity prices and higher transportation costs.

The technology-heavy NASDAQ Index is down about 24% so far this year, compared with a considerably more modest decline of around 10% by the old economy stocks of the Dow Jones Industrial Average3.

There are many ways of illustrating the travails of tech stocks so far in 2022, but perhaps they are best exemplified by the experiences of the celebrated EV and space-tech entrepreneur Elon Musk.

Twitter is now trading at around 32% below the price Musk bid for it last month which, at the time, was presumably good value in Musk’s book. Meanwhile, Tesla is down 33% on a year- to-date basis, despite the company making record deliveries of EVs in the first quarter4.

I have to say if I was buying tech today, I’d be a lot more content as a regular saver than a lump sum investor. However, that is the nature of things. The best time to buy is very often also the time it is most difficult to convince yourself to do so.

In actual fact, the opportunity could be huge. Buying into the tech companies set to shape the future long after inflation has moved into retreat and this current interest-rate-setting cycle that has passed by could be a savvy move.

Against that, and especially over the short term, there remain substantial headwinds that cannot be ignored. Inflation in America looks as if it could hit 10% this year and that doesn’t square well with interest rates just under 1% if you look at “normal” historic ratios of interest rates to inflation.

Markets are likely to remain volatile so long as investors continue to evaluate the level rates may have to go to in the Fed’s attempt to contain inflation.

Moreover, while the latest corporate earnings season has largely been hailed a success – US companies grew their earnings at a faster-than-expected rate of 9% – profits growth for the year as a whole is nowhere near likely to scale the heights we saw last year5.

One factor that has improved, of course, is valuations. US shares have fallen as earnings have increased. Today, stocks trade on a much more reasonable 17.6 times the amounts companies are expected to make over the next 12 months, compared with 22 times this time last year5.

That suggests markets have factored in some downbeat scenarios for the US and world economies this year that leaves quite a bit of room for a ratings expansion once investor sentiment recovers. It’s been quite a while since we could say that.

Watch Tom Stevenson’s outlook for the US this quarter

Source:

1 Target Corp, 18.05.22
2 Bloomberg, 19.05.22
3 Tesla Inc., 22.04.22, and Bloomberg, 17.05.22
4 Tesla, 19.05.22
5 Factset, 06.05.22

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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