Thu, 27 Mar 2025

Thu, 27 Mar 2025 Why are tech stocks so volatile?

Shares in technology firms have both fallen and risen sharply over the past year.
Investors in high-tech shares are taking a gamble, with share prices fluctuating wildly based on hopes of future profits rather than current dividends or growth. This volatility is similar to the early days of the car industry, where many companies went bankrupt before Ford and Chrysler emerged as dominant players. Experts say that investors are essentially betting on which tech firms will win in the long run, much like people did with motor companies a century ago. But unlike boring companies that pay reliable dividends, high-tech businesses often invest all their profits back into growth, making their share prices highly sensitive to changes in expectations. As a result, even small changes in growth forecasts can cause significant drops or surges in share values, affecting many companies at once. This is not dissimilar from the dotcom boom of the early 2000s, where companies with high growth prospects suddenly disappeared when those prospects vanished. The "magnificent seven" tech giants - Nvidia, Alphabet (Google's parent company), Amazon, Apple, Microsoft, Meta (Facebook's owner), and Tesla - are particularly vulnerable to market fluctuations. These firms are young, dominant in rapidly changing sectors, and their business models can be easily disrupted by new entrants. The rise of AI has added an extra layer of volatility, with investors piling into shares that promise future growth but may not deliver today. As one expert notes, "At least in 1910 you knew what automobiles did, but today with AI companies you have to rely on the wisdom of the crowd, and for AI companies that isn't good enough." In this environment, share prices are often a reflection of investor optimism rather than a rational measure of a company's value. As one expert warns, "Optimism does not always last... it is often short-lived, passing, and faddish."
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