With higher rates on the horizon, some pandemic-favorite stocks are suffering

Many of the stocks that have suffered recently are technology and innovation-related businesses, some of which do not make regular profits. The group includes stocks that surged last year to reshape economic activity as the pandemic hit, and that could seem too costly as the US economy reopens rapidly.

Shares that have lost more than 25% in the past three months: Snap Inc., Zoom Video Communications Inc., Twitter Inc., Pinterest Inc., Peloton Interactive Inc., Zillow Group Inc., Beyond Meat Inc. and Stitch Fix Inc. The S&P 500 is up 0.8% in that period, even if factoring in the sell-off in two of the last three trading days.

The decline in formerly high-flying discretionary tech stocks highlights the risk posed by the prospect of higher interest rates. Investors and analysts say they see no immediate threat to the progress of the broader market, which has been driven by tech giants such as Microsoft Corp., Apple Inc. and Google parent Alphabet Inc.

“If you’re Amazon, Microsoft or Apple, you don’t have to borrow at low rates—you have a big cash balance sheet,” said Greg Basuk, chief executive of AXS Investments. “Mega techs are much less affected with rising rates.”

In those recent backtests, several companies have given investors reason to hesitate. Pinterest recently reported fewer monthly active users than Wall Street expected. Snap said it expects growth to slow this quarter because of changes to Apple’s App Store privacy rules.

Beyond Meat said it expects revenue in the fourth quarter to be below analysts’ estimates. Zillow unexpectedly ended its home flipping business. Zoom reported slow sales growth.

In the most recent quarter, Zoom, Pinterest and Stitch Fix reported net income, while Twitter, Zillow, Peloton, Beyond Meat and Snap reported losses.

Beyond personal business growth and forecasts, innovation-oriented stocks tend to be sensitive to expectations of rising interest rates. Many such companies rely on far-reaching earnings growth to justify their stock prices. When rates rise, future cash flows are reduced in today’s calculations, which are often used to assign value to a stock.

Stock markets fell on Tuesday after Federal Reserve Chairman Jerome Powell signaled that the central bank would consider moving more quickly to scrap its easy-money policies. Central bank officials are grappling with the uncertainty created by high inflation and the emergence of the new Omicron coronavirus variant.

“If the Fed tapers and rates are rising, you likely have a more sensible stock market,” said Jay Hatfield, chief executive and portfolio manager at Infrastructure Capital Advisors. “In a more sensible market with higher interest rates, more valuable, unprofitable, money-loss companies tend to perform poorly.”

While the S&P 500 fell 1.9% that day, many lagging stocks fell further. Shares of Beyond Meat were down 5.8%, Stitch Fix was up 5.5%, Twitter shares 4%, Zoom shares 3.5% and Snap lost 2.5%

The stock’s set went ahead of the market in 2020, as the pandemic left many people working from home, shopping and socializing. Shares of Peloton advanced more than 400% last year, while shares of Zoom gained nearly 400%. Shares of Pinterest jumped nearly 250% and Snap’s shares tripled. Some investors said the group members may have gotten ahead of themselves.

“Investors were probably more enthusiastic about them,” said Irene Tunkel, chief US equity strategist at BCA Research. “They have returns borrowed from the future.”

This story has been published without modification to the text from a wire agency feed