Tech stocks get pounded — here are a few simple reasons why

·Anchor, Editor-at-Large
·4-min read

Tech stocks have gotten short-circuited so far this week, crushed under the weight of the lofty expectations built into them by profit-hungry investors. 

The Nasdaq Composite fell close to 1% in early trading on Tuesday, extending its five-day loss to 2.1%. But underneath the hood of the Nasdaq tells the broader story of a market losing a bit of risk appetite. 

Tesla shares dropped by as much as 5% in today's session, and was the top trending ticker on Yahoo Finance around noon ET. Virgin Galactic lost 6%, while Apple shed about 2%. 

Yahoo Finance takes a quick look at what could be driving the reassessment of richly valued tech stocks by Mr. Market. 

Fed member spooks growth investors

Cleveland Federal Reserve President Loretta Mester sparked concern on stock valuations and inflation in an exclusive interview with our Brian Cheung on Yahoo Finance Live

"My read is that there is certainly in terms of equity prices there is upward — they are high. There is upward valuation pressure there," Mester said. 

Mester also appeared to be open to letting inflation run hot — something tech investors probably didn't want to hear. In effect, it raises the potential for the Fed to perhaps lift rates in 2022 to combat inflation, which is often not a good backdrop for investors in tech who prefer to invest alongside low interest rates. 

The Fed’s target on inflation is 2%.

“Seeing inflation move up to two and somewhat above 2 [percent] is not a problem,” Mester said in the interview.

Goldman keeps it real on taxes and tech

The week didn't start well for tech investors as a note out by Goldman Sachs on tech profits was widely chatted about on the Street. 

"If the Biden corporate tax plan were fully enacted, FAAMG [Facebook, Apple, Amazon, Microsoft and Google] 2022 estimated earnings would decrease by roughly 9% relative to consensus expectations," Goldman Sachs chief U.S. equity strategist David Kostin said

The Biden administration is seeking to lift the corporate tax rate to 28% from the Trump-era's 21%.

He is also readying to increase the capital gains tax on the wealthiest Americans to 43.4%, including a surtax to help fund infrastructure investments. The current capital gains tax stands at a top rate of 23.8%, which has been in place since Jan. 1, 2013. Kostin added that FAAMG stocks are also vulnerable to any increase in the capital gains tax.

"If the capital gains tax rate becomes set to rise in 2022, investors subject to the higher rate may choose to realize some of their substantial capital gains in 2021 at the lower current tax rate. The FAAMG stocks have appreciated by $5 trillion during the last 5 years, accounting for 29% of the S&P 500 market cap increase during that time," Kostin said.

Tech stocks break down on the charts

The weakness in tech stocks these past five sessions has spurred technical breakdowns on the charts, Wall Street observers note. In other words, tech stock bulls are losing the battle in sentiment to the bears and it's unclear right now what shifts the narrative back. 

"Even though the Nasdaq (and the broad XLK tech ETF) were not hit as hard as the chip stocks were yesterday, they still saw some considerable weakness. The Nasdaq closed RIGHT ON its own 100-day moving average. That line has been an even better support level for the Nasdaq…bouncing off of it four other times since September of last year. Therefore, if it breaks below that line in any significant way…like it looks like it’s going to do based on where it’s trading right now…it will raise a big yellow flag on the index," says Miller Tabak chief markets strategist Matt Maley. 

Maley points out that the widely tracked VanEck Vectors Semiconductor ETF fell below its 100-day moving average on Monday, a negative development to momentum traders in tech.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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