What happened
Shares of cloud-based software leaders Snowflake (SNOW -0.26%), Datadog (DDOG 1.19%), and HubSpot (HUBS 2.55%) were falling back to earth today, down 7%, 7.2%, and 7.2%, respectively, as of 2:38 p.m. ET -- more than reversing yesterday's big gains.
Just as high-growth tech stocks surged yesterday on hopes for declining inflation without large job losses, today saw two data points that might have thrown cold water on each of those predictions.
First, some big-tech and other software companies reported earnings last night, showing a significant deceleration in cloud growth. But don't tell that to the rest of the non-tech economy; today's January jobs report blew past expectations, suggesting the labor market remains very tight. That could mean the Federal Reserve might not be able to end its rate hikes as soon as some had thought.
Both turns of events are incremental negatives for tech stocks, so the past week's gains went into reverse pretty quickly.
So what
In January, the U.S. added a staggering 517,000 jobs -- nearly triple the 188,000 expected! The unemployment rate fell to 3.4%, the lowest since 1969, versus the expected 3.6% rate, with only a minor uptick in the labor participation rate (the percentage of people working or actively looking for work).
Average hourly earnings were a bit better, however, increasing 4.4% year over year, slightly above the 4.3% forecast. In addition, December's jobs numbers were upwardly revised to 260,000 from the 223,000 previously reported.
It's great that so many people are employed, but if the labor market is running too hot, the Federal Reserve might have to hike interest rates more than investors expected as recently as yesterday.
On Thursday, labor unit costs and productivity numbers pointed to a moderation in wage pressure and an increase in productivity – a good sign of moderating inflation. And at his Wednesday press conference, Fed chairman Jerome Powell gave encouraging commentary on the disinflation he is seeing in the economy.
So while job growth and increased wages are good in moderate amounts, today's blowout report could suggest more overheating and inflation than expected. And that could lead market participants to rethink their declaration of victory over inflation earlier in the week.
Yet despite the red-hot jobs figures in the economy overall, the technology sector continues to see deceleration and weakness coming off the big pandemic-fueled gains of the last three years.
Last night, cloud computing leader Amazon (AMZN -1.14%) reported a fairly significant slowing in its Amazon Web Services (AWS) unit. Fourth-quarter revenue growth for AWS fell to 20%, down from 28% in the prior quarter and 40% in the year-ago quarter. Even worse, on the conference call with analysts, management said that in January, AWS growth had fallen to the mid-teens.
Besides Amazon, another cloud-based software company, Bill.com (BILL -2.29%), was down 25% today as of this writing, despite beating fourth-quarter estimates, as the company projected very weak total payments volume in the quarter ahead.
Bill.com makes cloud software that simplifies, digitizes, and automates the back-office payments processes for small businesses. It also appears to be seeing a big slowdown in tech spending.
Bill.com's customer base likely overlaps with that of HubSpot, a leader in digital marketing and customer relationship management that also focuses on small to medium-size businesses.
So, while Bill.com's muted outlook could spell trouble for HubSpot, Amazon's muted cloud computing forecast doesn't exactly bode well for enterprise data software companies Snowflake and Datadog, which run on top of AWS and other clouds.
Combine that with today's perhaps-too-hot jobs report, which could usher in higher interest rates, and its no surprise to see rate-sensitive growth stocks selling off in a big way.
Now what
Even after these stocks' large declines from their highs, I cautioned yesterday they were still not cheap and could remain volatile, despite some signs of improvement on inflation. While I didn't expect such a large and sudden reversal off yesterday's gains, big daily swings like today's shouldn't be surprising for those who invest in these high-priced names in digital transformation.
Each of these companies has winning products, an excellent management team, and large growth opportunities, and therefore merit being on an investor's watch list. But their valuations remain somewhat high, which doesn't leave much room for error. They are still appropriate only for young investors with a very long time horizon, and the ability to withstand near-term volatility.
