What happened

Stocks are getting rocked amid multiple bearish catalysts on Thursday, and leading semiconductor companies are participating in the sell-off. Shares of Advanced Micro Devices (AMD -5.44%), Qualcomm (QCOM -2.36%), and Skyworks Solutions (SWKS -1.55%) were down 3.5%, 4.3%, and 5.4%, respectively, as of 1:15 p.m. ET. Meanwhile, the tech-heavy Nasdaq Composite index was down roughly 4.6%.

Investors have been jumpy lately due to high levels of inflation and concerns about interest rate hikes, and the Federal Reserve sent a hawkish message to the market by announcing its highest rate hike since 2000 and issuing comments suggesting a potentially fraught economic outlook. Making matters worse, Russia ramped up its attacks on parts of southern and eastern Ukraine, signaling that the conflict is likely not heading for the drawdown phase some investors have been hoping for. 

A circuit board.

Image source: Getty Images.

So what

April marked the Nasdaq Composite index's works month since October 2008, and volatility is continuing early in May's trading. While semiconductor companies are generally faring better than those in the software industry, growth-oriented technology stocks are seeing a dramatic pullback in today's trading.

The Fed announced a 50-basis-point interest rate hike at yesterday's meeting, and the market is reeling. While many investors and analysts had already expected an increase at that level in order to fight inflation, comments from the central banking authority were broadly bearish for the market. Fed officials warned that the war in Ukraine could have unexpected consequences for the U.S. economy and also cautioned about supply chain disruptions stemming from China's recently implemented pandemic lockdowns.

Now what

Rising interest rates typically hurt performance for growth stocks because they make it more expensive to borrow money for expansion initiatives or investing in the market. A high-interest rate environment also generally means investors have less incentive to put money into relatively risky stocks because they can get safer returns elsewhere. 

The Fed will meet five more times this year and will likely raise rates with each additional meeting. Following yesterday's hike, it looks like the market is becoming even more cautious about the overall economic climate and now expects an even higher rate at year-end than previously anticipated.

Investors and analysts were already worried that substantial rate hikes could push a fragile economy into recession this year, and recent U.S. Department of Commerce data showing that the economy actually already contacted 1.4% in the first quarter sets up a worrying dynamic. Based on the Fed's recent rate hike and comments, the unexpected gross domestic product contraction in the first quarter will not cause the central bank to take a softer approach to raising rates this year, but inflation ran hot in the period even amid a shrinking economy.  

Today is shaping up to be one of the worst days for growth since the March 2020 crash. Even with big sell-offs lately, Qualcomm and AMD are still up over the last year of trading. Meanwhile, Skyworks has seen a dramatic pullback across the stretch. 

QCOM Chart

QCOM data by YCharts

Trends including the rollout of 5G, augmented reality, the metaverse, and growth for data centers all point to strong long-term demand outlook for the semiconductor space. More devices and services rely on chips than ever before, and this dependence will only increase going forward. However, the industry won't be immune to near-term market volatility, and investors will still need to be selective about which industry players they put their money behind.