It’s another big week for corporate earnings, especially in the tech sector. We’ll hear from Microsoft and Alphabet on Tuesday, Meta on Wednesday, and Apple and Amazon on Thursday.
When those companies report, investors will be looking for any signs of a slowdown. In fact, all of the tech companies reporting this week have already implemented hiring slowdowns, hiring freezes and even layoffs this year.
But there’s a broader obstacle that tech companies in particular have been facing this year: rising interest rates.
One thing that makes tech different from other sectors is that these companies often make more of a promise to investors, rather than delivering short-term results.
They basically say, “Give us your money now, we’ll innovate and eventually earn more cash down the road.” That’s why tech companies are often known as growth companies, said Northeastern University’s John Bai.
“Meaning that these are [research and development]-intensive entities that derive most of their value from way down into the future.”
But the thing is, interest rates are rising right now. As a result, investors are starting to have a lot of other options, according to Kelly Shue, a finance professor at Yale.
“They could invest in, let’s say, government bonds, long-term government bonds — and those are offering a higher interest rate,” she said.
That’s likely a big reason why tech stocks have fallen this year. Investors are wondering whether it’s worth waiting around for all that innovation, said Evan Rawley at the University of Connecticut.
“It’s basically: people are becoming more impatient,” he said. “Raising the interest rate makes you less patient for future cash flows.”
All of this means that tech companies might wind up spending less on research and development or on capital expenditures — things like equipment and office space.
For tech companies, higher rates also reduce demand for their products, per Santosh Rao at Manhattan Venture Partners. As a result?
“Companies will adjust their production levels, their hiring levels, and everything, so it has a knock-on effect across the board,” he said.
And as interest rates keep rising, Rao added that tech companies will feel the pinch well into next year.
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