about 2 years ago • 1 min
After posting huge gains in the 12 months following the March 2020 pandemic panic, investors appear to be rapidly souring on unprofitable technology stocks.
The chart shows how Goldman Sachs’s non-profitable tech index – a gauge of some of the most popular stocks in the market – has tumbled more than 40% from its February high. The Ark Innovation exchange traded fund (ticker: ARKK), which invests in plenty of these fast-growing companies that are yet to turn a profit, has fallen 27% this year as firms like Crispr Therapeutics and Skillz dropped more than 50%.
There are a few explanations for what might be going on here. Perhaps investors think the economy is finally turning a corner, reducing the need to pay over the odds for fast-growing companies. Or perhaps the Federal Reserve’s hints that it will tighten policy faster than expected is boosting expectations that safe assets like US government bonds will start paying a more reasonable return – cutting the attractiveness of high-growth stocks’ potential future earnings. Or perhaps retail investors are simply tiring of the stress of owning volatile stocks and – as with crypto – fleeing the market in search of more reliable returns.
Either way, for now it looks like many of the past year’s winners were merely high-beta investments – which rise faster than the market in good times but also fall faster in bad – rather than giving true alpha – the holy grail of genuine above-market returns.
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