NASDAQ stock exchange building, New York. Photo: Photononstop via AFP

America’s giant tech monopolies puffed the capitalization of America’s stock market to dreamland proportions, and are waking up with a hangover as the era of easy money crashes to an end.

Federal Reserve largesse drove equity valuations in the form of falling real interest rates, which pushed investment flows out of bonds into stocks. The ensuing inflation forced the Fed to tighten, and toppled the tumescent stock market.

The NASDAQ 100 as of the April 29 close had lost more than 22% since Dec. 28, when I asked, “Can tech stocks survive Fed tapering?” I warned that tech stocks

earn only 0.7% of the S&P 500’s total revenue, but account for 12.2% of its market capitalization. This remarkable divergence of valuation might be the biggest bubble in market history: As the ‘real’ or inflation-indexed yield of US Treasury securities fell into deeply negative territory, the price of tech stocks rose in a nearly perfect straight line. Investors are buying tech stocks the way they used to buy utilities, as a source of monopoly income streams whose value depends on the return to the risk-free alternative, in this case real Treasury yields.

The tech complex is going down the way it came, tracking the real Treasury yield almost tick for tick.

During 2021, money illusion ran wild as $6 trillion of federal stimulus pushed up GDP growth – but pushed up inflation even faster. Input costs outran even Amazon’s ability to raise prices, and the market-leading retail-and-computing giant registered its first loss in seven years during the first quarter. Amazon led the S&P 100 down with a 14% daily decline on April 29.

The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are down nearly 30% on the year. Netflix is down 68% and Amazon is down 40%.

It could get much uglier if the US economy tips into recession. Thanks to 8.5% inflation, real hourly earnings in the US are down by 2.7% in the year ended in March. Consumers used their stimulus checks to pay down credit-card debt during 2020, but borrowed it all back during 2021.

News on April 28 that US GDP had shrunk at a 1.4% annual rate during the first quarter was a bucket of cold water for the stock market. Modest growth was expected. Instead, a sharp deterioration of the trade balance pushed GDP growth into the negative, despite a modest improvement in consumption, as I wrote yesterday.

Nothing quite like this has ever happened before. Net exports under normal circumstances are negatively correlated with growth, for an obvious reason: Economic growth rises normally with rising demand, and rising demand increases imports.

A combination of chronic underinvestment and attrition of the labor force after massive income subsidies left American industry unable to meet even the increase in consumer demand during the first quarter. Instead of producing more, the US imported more, mainly from China. The evidence suggests that the US didn’t produce more because it couldn’t.

The tech giants did a great job of producing bytes and pixels, but not much else. In February 2021 they traded at 50 times forward earnings. On April 29 the multiple was 22 times forward earnings.

Consumers pressed by inflation are cutting back on fluff. Netflix warned that it will lose 2 million customers, and its stock price cratered. If the US goes into recession, the tech complex could face something like the devastation that ensued after the 2000 recession. The NASDAQ 100 lost more than 80% of its value between March of 2000 and September 2002.

I doubt it will be as bad as that – the pioneering tech companies of the 1990s now are monopolies earning real revenues – but the worst isn’t yet over.

Follow David P. Goldman on Twitter @davidpgoldman