The biggest tech stocks of the year fell from glory

The business became so popular, it got its own nickname: FAANG.

The music stopped last year when interest rate hikes by the Federal Reserve reversed the momentum. Investors have been forced to reassess the pros and cons of holding shares of companies focused on their ability to generate windfall profits for many years into the future.

Eric Knutzen, chief investment officer of multi-asset strategies at Neuberger Berman: “When money is essentially free … you’re willing to place a large premium on future earnings, especially growth stocks.” “When rates go up, that all changes.”

Meta is down 64 percent in 2022. Netflix is ​​down 51%; The other three stocks were down at least 27 percent. The FAANG stocks have collectively posted more than $3 trillion in market capitalization, helping to drag the broader stock market down with them. The S&P 500 is down 19 percent, its worst year since the 2008 financial crisis.

Why are big tech stocks getting so much attention? The S&P 500 is weighted by market value, so the largest companies in the index have the biggest swings in direction. Even after last year’s recession, the five FAANG stocks account for 13% of the index’s weight. It’s down about 17% by the end of 2021, according to S&P Dow Jones Indices.

In other words, FAANG stocks include a basket of megacap technology companies, including Microsoft Corporation

Nvidia Corporation

And Tesla Inc.,

It was responsible for more of the S&P 500’s 2022 decline than all other components combined. According to analysis by Bespoke Investment Group.

When interest rates were close to zero, investors were more willing to pay for growth stocks and riskier assets in their search for higher returns. But since the 1980s, the Fed has been increasing at a much faster pace, and the market has now shifted to favoring investments that generate cash for the holder.

Investors are reaching for inflation-adjusted gains and safety plays, which have underperformed in rocky market conditions over the past year. The S&P 500 energy sector rose 59% in 2022 as geopolitical tensions pushed oil prices higher. Utilities, consumer staples and healthcare companies—known as defensive stocks—have outperformed the broader index regardless of market conditions.

“Tech stocks became popular and overvalued during the pandemic,” said Gina Bolvin, president of Bolvin Wealth Management Group. In the year In 2022, “value is back in style.”

That swing caused the stock market leaderboard to change. Tesla, for example, entered 2022 as the fifth-largest company in the S&P 500 and finished as the 11th-largest. Meta fell to 19th, his sixth of the year. Exxon Mobil Corporation

Meanwhile, he did not crack the top 25 in the first round and ended the year in eighth place.

As consumers and businesses tighten their belts to fight the worst recession, tech companies that seem immune to the pandemic’s economic woes have found their earnings sluggish. Companies like Microsoft have reported quarterly results over the years. Amazon and Meta announced layoffs.

“There was a belief that these revenue streams for technology and communications services are impervious to the ups and downs of the economy,” said Zach Hill, head of portfolio management at Horizon Investments. “Investors should take this into account.”

Mr. Hill said the firm was overweight energy stocks last year and that investors prefer value stocks that are thought to be trading below their value. The company continues to find a selection of value-oriented investments and is wary of megacap tech stocks, he said.

Even after the decline in tech stocks last year, the sector still looks expensive compared to the broader market. Stocks in the S&P 500’s information-technology sector are trading at roughly 20 times earnings over the next 12 months, according to FactSet. Meanwhile, the broader index has a multiple of around 17.

Still, Big Tech’s market influence is unlikely to change anytime soon, strategists and investors say, barring another few years of 2022-like shows. This means the broader indexes may remain under pressure as long as megacap tech struggles.

Eric Sterner, Apollo Wealth Management’s chief investment officer, said his firm has adjusted its technology exposure in 2022 to focus on healthcare, utilities and energy stocks. He said he thinks the technology could once again reign as the market leader when the Fed starts cutting interest rates, which he estimates could happen in 2024.

“Once we get ready to recover, I expect those technology companies to resume their leadership positions as they are the most innovative companies out there,” he said.

Write to Hannah Miao at hannah.miao@wsj.com