Indeed, data revealed on Thursday showed the US consumer prices index (CPI) increased to 7.5% in January, the highest it has been since mid-1982.
Inflation is bad sign for tech companies and other high-growth stocks as rampant inflation should lead to rising interest rates. This would then impact valuations, as tech stocks are usually priced against their future earnings. Any increase in the interest rate, which is used as the base assumption, would reduce the emphasis put on these future earnings.
Put simply if a company grows at 5% per year, but interest rates rise from 0% to 3%, the relative value of these future earnings has dropped from 5 percentage points to 2 percentage points.
Sandra Holdsworth, head of rates UK at Aegon Asset Management, said that speculation regarding the outcome of the next Federal Open Monetary Committee will now “run rife”, with markets pricing in as many as four rate rises this year already.
“With inflation at these levels and still not expected to have peaked, it’s hard to argue whether 25 basis points, 50 basis points or even more is the right response from the central bank,” she said.
Yet there are reasons to be optimistic too. Some technology stocks have been so badly hit that they border on cheap. Netflix, for example, is down more than 30% this year alone.
For those that can’t tolerate the risk, there are also tech companies that have weathered the storm. Apple and Alphabet or example have lost less than 4% each this year at a time when tech stocks have tumbled.
Stock pickers told Trustnet that all of these stocks could be good investments going forward, regardless of the macroeconomic environment.
Meanwhile, despite the tough environment, Baillie Gifford announced this week that it was doubling down on private companies.
The firm, which is synonymous with growth investing, has increased the amount its trusts can hold in private companies over recent months, essentially taking on more risk in the expectation that these conditions will not last forever.
Not everyone agreed however. Earlier this week Eve Maddock-Jones spoke to experts about the oil majors after encouraging results from both BP and Shell.
Highlights include IG’s Chris Beauchamp using the phrase “from famine to feast” and Fairview Investing’s co-founder Ben Yearsley asking and answering his own question: “Should you be investing in oil when the world is trying to decarbonise? The simple answer is yes.”
Maddock-Jones also explored the other sectors that should do well in the current inflationary environment, including financials, miners and infrastructure specialists.
All of these can provide protection from rising prices and should prosper if tech continues to stumble – something that may look like a forgone conclusion, but is by no means guaranteed.