The tech sector took a beating in 2020, but there are signs that things could rebound in 2022. Here’s what you need to know.
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It’s been a rollercoaster ride for tech stocks over the past year. After reaching record highs in early 2020, the sector was hit hard by the pandemic-induced market crash. While tech stocks have rebounded somewhat since then, they haven’t regained their pre-crash level of popularity.
With the pandemic now receding and the economy beginning to reopen, many investors are wondering if tech stocks will make a comeback in 2022. Here’s a look at some of the factors that could affect the sector’s performance in the coming year.
One of the biggest factors that could affect tech stocks in 2022 is interest rates. After years of historically low rates, the Federal Reserve has begun to slowly raise rates. This could make borrowing more expensive for companies in the sector, which could lead to slower growth.
another issue that could impact tech stocks is regulation. The new administration has already signaled its intention to roll back some of the deregulation that occurred under the previous administration. This could make it harder for tech companies to operate and could lead to increased costs.
Finally, competition from other sectors could also limit tech sector growth in 2022. With vaccine rollout underway and the economy beginning to reopen, many investors are shifting their focus away from tech stocks and towards sectors like industrials and materials that are more closely tied to economic recovery.
The current state of the tech industry
The U.S. tech industry is still in the early stages of a rebound from the pandemic-induced downturn, with most firms reporting only modest revenue gains in the second quarter. The industry is expected to return to pre-pandemic levels of growth in 2022, according to a new forecast from research firm Gartner.
Gartner’s data shows that the tech industry’s revenue rose just 2.8% in the second quarter of 2020, compared to the same period a year ago. That’s a marked improvement from the first quarter of 2020, when industry revenue fell 3.9% year over year. However, it’s still well below the pre-pandemic level of growth, which averaged 7% per quarter.
Looking ahead, Gartner expects the tech industry to return to its pre-pandemic growth rate in 2022, with revenue rising 7.2% that year. The firm expects strong growth in several key areas, including cloud computing, artificial intelligence (AI), and 5G wireless technology.
The potential for a rebound in 2022
In the aftermath of the dot-com crash of 2000 and the subsequent recession, tech stocks took a beating. They didn’t truly rebound until 2004. Will history repeat itself? Many analysts believe that tech stocks have the potential to rebound in 2022 after a period of correction.
There are several reasons for this optimism. First, the overall economy is expected to rebound in 2022 after a period of sluggish growth. This will provide a tailwind for tech stocks. Second, many leading companies in the tech sector are sitting on large cash balances and are well-positioned to invest in new growth opportunities. Finally, valuations for tech stocks are much more reasonable now than they were during the dot-com bubble.
Of course, there are also risks that could derail the rebound in tech stocks. Interest rates could rise faster than expected, which would negatively impact many companies in the sector. Additionally, trade tensions between the US and China could escalate, which would also weigh on demand for tech products.
Nonetheless, analysts believe that the potential rewards outweigh the risks and that tech stocks could be poised for a comeback in 2022.
Reasons to be optimistic about the future of tech stocks
1. Tech stocks have been on a tear in recent years.
In spite of the COVID-19 pandemic, the technology sector has outperformed the overall stock market by a significant margin in recent years. The Nasdaq Composite Index, which is heavily weighted towards tech stocks, is up nearly 60% since the bottom of the pandemic-induced market crash in March 2020.
2. Earnings growth is expected to accelerate in 2022.
One key reason for optimism about the future of tech stocks is that analysts expect earnings growth to accelerate in 2022. According to data from FactSet, earnings for the S&P 500 are expected to grow by 19.1% in 2022. This is a significant acceleration from the estimated 9.4% earnings growth in 2021 and 7.2% earnings growth in 2020.
3. Valuations are still reasonable.
Despite the strong rally in tech stocks over the past year, valuations are still relatively attractive when compared to historical norms. The forward price-to-earnings ratio for the S&P 500 currently stands at 18.4, which is below the 20-year average of 19.4 and well below the peak reached during the dotcom bubble (forward P/E ratio of 32).
4. Tech stocks offer a diversification benefit.
Another key reason to be bullish on tech stocks is that they offer a diversification benefit for investors who are heavily invested in other sectors such as energy or financials. This is because tech stocks tend to be less correlated with these other sectors and therefore can help to smooth out returns and reduce portfolio volatility over time.
Reasons to be cautious about the future of tech stocks
Although the technology sector has rebounded strongly from its pandemic-induced sell-off in 2020, some experts are cautioning that the stock market could be due for a correction in the coming year. Here are three reasons to be cautious about the future of tech stocks:
1. valuations are high
Technology stocks are trading at rich valuations relative to both their own history and the overall stock market. For example, the price-to-earnings ratio (P/E) of the S&P 500 Information Technology Index is currently around 30, well above its long-term average of about 20. This means that investors are paying a higher premium for tech stocks than they have in the past, leaving less room for error if earnings disappoint.
2. interest rates could rise
If interest rates rise as expected in 2021, that could put pressure on tech stocks as investors rotate out of growth stocks and into value stocks that offer greater yields. This dynamic played out in late 2020 when rising bond yields fueled a sell-off in tech stocks.
3. regulatory threats remain
Despite promises by the Biden administration to take a more hands-off approach to regulation than the Trump administration, there are still a number of potential regulatory threats looming over the tech sector. These include antitrust investigations into companies like Google and Facebook, as well as new data privacy regulations that could impact companies like Amazon and Apple.
As we enter 2021, the question on many investors’ minds is whether tech stocks will rebound in the new year. While there are no guarantees in the stock market, there are several reasons to believe that tech stocks could have a strong showing in 2022.
First, the overall stock market is expected to rebound in 2022 after a down year in 2021. This will provide a tailwind for tech stocks, which tend to be more volatile than the broader market.
Second, many of the big tech companies are expected to report strong earnings growth in 2022. This includes companies like Apple, Amazon, and Google. So if you’re looking for a sector to overweight in your portfolio next year, tech might be a good bet.
Finally, it’s worth noting that valuations for tech stocks are relatively attractive right now. This is due in part to the sell-off we saw in the sector in 2020. So if you believe that the long-term outlook for tech remains positive, now might be a good time to buy into the sector.