- More competition and higher borrowing costs will weigh on high-growth tech stocks, Bank of America says.
- BofA says the tech sector's lackluster performance so far in 2022 is also due to "weakening fundamentals".
- Growth stocks have less breathing room higher rates dampen future earnings outlooks.
This year is shaping up to be a reckoning for high-flying growth stocks, which are staring at a "perfect storm" of factors that will eat into their performance, according to Bank of America.
In a note on Monday, BofA analysts wrote that stiffer competition and higher borrowing costs as the Federal Reserve raises interest rates will cause big gainers in the tech, media, and telecom sectors to lose steam through 2022.
According to the bank, growth stocks have already lagged value stocks by 14 percentage points year-to-date, and earnings estimates for the Nasdaq 100 have fallen 0.4% while rising 4.3% for the S&P 500 since the third quarter of last year.
Growth stocks, many of which turn little or no profit as companies ramp up operations, have relied on cheap debt to fuel the expansions that drive future earnings projections. This creates challenges as borrowing becomes more expensive.
"A higher discount rate is hurting companies that need capital to innovate/compete, where the ultra-low rate environment until now had enabled frictionless investment in growth," the bank wrote.
And while higher interest rates are a big headwind, BofA says it isn't just higher borrowing costs hurting the outlook for tech.
Fierce competition for market share is also hurting some of the biggest names, with recent earnings among companies like and Netflix highlighting this struggle. The streaming giant reported a staggering loss of subscribers last quarter, its first in 10 years, and pointed to strong competition as one reason for its poor performance. Shares lost more than a third of their value following the report.
BofA is downgrading its 2022-2023 earnings per share estimate to account for sluggish growth in the tech sector. 100 companies in the S&P 500 — about 24% of the overall index — have already reported first quarter earnings so far. 51% of those companies beat their EPS and sales estimates, BofA says, which is mostly in line with the same period last quarter. April guidance is the weakest since 2020, and BofA says 13 stocks so far have lagged by an average of 4.6 percentage points.