The stock market was having a rough day on Tuesday, with all three major averages in the red. At 1 p.m. ET, the Dow Jones Industrial Average, S&P 500, and the Nasdaq Composite were all lower by 1.5% or more.
Some of the most popular high-growth stocks in the technology sector were performing even worse. Social media stock Pinterest (NYSE:PINS) was down by about 2.5%, videoconferencing leader Zoom Video Communications (NASDAQ:ZM) had fallen by nearly 5%, and telemedicine company Teladoc Health (NYSE:TDOC) had declined by almost 6%.
What's more, all three of these stocks were higher shortly after the market opened, and abruptly reversed course midmorning.
The big story rattling the market this week is the recently discovered omicron variant of COVID-19, which appears to be more resistant to vaccines and antibody protection than previous variants of the virus.
On the surface, this might sound like a potentially positive catalyst for these three companies. After all, all three are clear "stay-at-home" stocks that benefit from things like lockdowns, remote work, and store closures. Pinterest's user growth was off the charts for 2020 as millions of people found themselves with more time to browse for things online. Teladoc was a big winner as many physicians' offices decided to move healthcare to virtual settings whenever practical. And with millions of people working remotely for the first time in 2020, there's a solid argument to be made that no company was a bigger winner in 2020 than Zoom.
On the other hand, there are some different dynamics this time around, especially when it comes to inflation and interest rates. In 2020, inflation was nonexistent and interest rates were at record lows. Now that's starting to change, and it doesn't look like inflation is as "transitory" as experts had predicted (in fact, Federal Reserve Chair Jerome Powell said today that that word should be retired).
Powell also indicated that the Fed's bond-buying taper could potentially happen faster than expected, and that we could potentially see rate hikes sooner than anticipated if the Fed needs to get inflation under control.
Generally speaking, rising interest rates are a negative catalyst for the stock prices of high-valuation growth stocks like these three. One key point to know is that as risk-free yields rise (say, those paid by Treasuries), riskier stocks start to look less appealing to investors. This can put negative pressure on stocks like these.
It's important to point out that rising rates do not directly impact these companies' underlying businesses. They're generally not reliant on debt, so borrowing costs won't rise dramatically. But if the Fed does indeed start getting more aggressive with its monetary policy, it could certainly put even more short-term pressure on them going forward.