What happened

E-commerce stocks were getting hit hard as the broad market resumed its sell-off after a brief respite today. 

Investors still seemed spooked after Federal Reserve Chairman Jerome Powell essentially told Wall Street that the central bank would continue to raise interest rates until inflation was brought to heel even if it meant rising unemployment and a recession.

This morning, initial unemployment claims came in lower than expected, showing the job market remains strong. Just 193,000 Americans filed for first-time unemployment last year, the lowest total since April. That data point is likely to encourage more interest rate hikes.

E-commerce stocks like Wayfair (W -0.02%), Farfetch (FTCH 1.03%), and Global-E Online (GLBE 0.78%) were on the decline today as the sector is exposed to rising rates in multiple ways. First, rising rates tend to punish growth stocks as they make earnings in the distant future less valuable since discount rates rise in financial models. They also make the chances of recession more likely, which would weigh on consumer spending. Finally, higher interest rates have also made the dollar stronger against international currencies, a challenge for global companies like Farfetch and Global-E Online, as dollar-denominated earnings for international companies are worth less when the dollar is strong.

As of 12:49 p.m. ET, Wayfair was down 8.2%, Farfetch had fallen 7.6%, and Global-E Online stock was off 3.8%. At the same time, the Nasdaq had lost 3%.

So what

Even before the slide over the last week, these stock were already struggling. All three experienced by sales booms during the pandemic as consumers flocked to online retail sites like Wayfair and Farfetch.

However, as the global economy has reopened, consumer spending has shifted back to other channels like brick-and-mortar stores and services like travel and restaurants. Consequently, revenue growth at a number of e-commerce companies has fallen sharply and even turned negative in some cases. 

For example, Wayfair, an online home furnishings retailer, saw revenue decline 14.9% in its most recent quarter to $3.3 billion. The stock is now down roughly 90% from its peak during the pandemic, and is approaching its nadir in the market crash in March 2020. After briefly turning profitable during the pandemic, Wayfair is losing money again. It posted an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $108 million and a net loss under generally accepted accounting principles (GAAP) of $378 million in the quarter. While the year-over-year comparison will eventually get easier, rising interest rates and an increasing risk of recession will only make it more difficult for the company to return to growth.

Farfetch, a luxury online fashion company, was also a pandemic-era darling as it was one of the few apparel companies to see strong growth during the social distancing period. That's a testament to the strength of the luxury sector and the attractiveness of Farfetch's leading position online. Farfetch not only sells clothes, but also helps fashion brands run their own online businesses through Farfetch Platform Solutions.

In the second quarter, gross merchandise value increased just 1.3%, or 7.6% in constant currency, and the company posted an adjusted EBITDA loss of $24.2 million. The company's once-strong growth is gone for now, and the strong dollar has hit it hard since most of its revenue comes from outside the U.S.

Finally, Global-E Online has seen its share price drop nearly two-thirds from its peak over the last year as headwinds in the e-commerce sector have formed. However, the company, which offers a platform for cross-border e-commerce sales, has continued to deliver strong top-line growth with revenue up 52% to $87.3 million. It also posted an adjusted EBITDA profit of $11.1 million, though it lost money on a GAAP basis. The company actually expects revenue growth to accelerate to 70% in the third quarter, but did note economic uncertainty in its earnings report. A strengthening dollar could weigh on the company's performance.

Now what

While Global-E Online has fared well in the current economic climate, e-commerce stocks in general have faced stiff headwinds. No one knows how long the Fed plans to hike interest rates, but for now, U.S. monetary policy seems to be the market's primary focus. It will likely take an unexpected catalyst to change that.