Fundhouse Insights - Understanding Friday's Tech Sell-Off
This article has been prepared by Fundhouse and is reproduced by LifeMap Financial Planning for general information. It reflects Fundhouse's views as at the date of publication and those views may change. It does not take account of your individual circumstances and should not be treated as personal financial advice or a personal recommendation.
Friday’s market turbulence was a useful reminder that even the strongest investment themes are heavily subject to volatile euphoric/panic sentiment of the investor. The tech-heavy Nasdaq had its worst day since the April 2025 tariff turmoil, with semiconductor and AI-related companies among the biggest fallers. Stronger-than-expected US employment data prompted investors to question whether interest rates may remain elevated for longer than previously anticipated, borrowing costs moved higher and, as they did, some of the market's most highly valued growth companies, including the likes of Intel, Nvidia and Tesla, came under pressure. In the grand scheme of things, Friday’s market moves were insignificant within a long-term context, but we felt it was worth exploring.
At first glance, the relationship may seem strange. What does a strong US jobs report have to do with technology stocks? The answer lies in interest rates. Many of today's leading technology companies are valued based on profits expected far into the future, as we see with the upcoming public listings of technology and AI companies such as SpaceX and OpenAI. A strong jobs report (potentially) implies good economic growth and, therefore, the prospect of increased interest rates. Why do interest rates matter? Here's a simple example. Imagine someone offers you £100,000 in five years' time:
Scenario 1 — interest rates at 0%: That £100,000 is worth close to £100,000 today, because money sitting in a savings account earns almost nothing.
Scenario 2 — interest rates at 10%: That same £100,000 is only worth around £62,000 today. Why? Because £62,000 invested at 10% per year in a savings account would grow to £100,000 over five years on its own (ignoring tax).
This is at the heart of Friday's tech sell-off. Because these companies are valued on profits expected far into the future, even the prospect of higher interest rates can make those distant cashflows worth meaningfully less today - and that is enough to send their share prices lower.
This also helps explain why tech companies and bonds did so well during 2020 and 2021, when the economic news was less positive and the market expected interest rates to fall (because of Covid). We saw a significant increase in bond and tech company valuations at this time.
But interest rates can be a red herring too. We know they are difficult to forecast and, let's be honest, since interest rates have moved from close to 0% five years ago to 3.75% today (in the UK and the US), we have seen technology companies rise in value. So, this relationship between interest rates and tech names can be random. This is why we emphasise the importance of negating forecasting within our process. Firstly, most people (including us) are unlikely to forecast interest rate movements correctly. And secondly, even if we could forecast, the market tends to behave in ways that can be unpredictable.
Ultimately, it seems the market is very aware of the high valuations placed on the US tech sector. And it becomes twitchy when news as arbitrary as a US jobs report comes out. This is understandable, when we are seeing their cash flows falling (because of AI-related data centre and chip spending), debt increasing (using debt to fund the data centres), and prices rising. Although names like Nvidia, Alphabet, Microsoft, Amazon, Meta, SpaceX, and Apple are fabulous companies, there is a point at which a good company can become a poor investment. This point is where the price you pay for those companies has been baked into a future that is likely to be too optimistic. And they have already gone up a lot, suggesting returns may have been borrowed from the future.
We have tilted your portfolios away from these names, not because we fear interest rates rising. But a fear that their prices are too high. We therefore expect to remain underweight in this market segment, while maintaining selective exposure and monitoring developments closely.
Disclaimer - Fundhouse is the trading name of Fundhouse Bespoke Limited. Fundhouse provides investment management services and does not provide financial advice. Importantly, this note does not represent investment advice and any reader should always speak to their financial adviser before making any investment decisions. Please note that the value of any investment may go down as well as up and you may lose capital when investing and the value of your investments may not always increase. Please ensure that you are comfortable bearing financial losses and that you are comfortable taking a long-term investment view of five years or more.
