It may only be two weeks into the new year, but Wall Street’s decision to kick the tyres on the long tech rally has set a new tone.

After a rise supercharged by a pandemic-induced bump in digital spending, a correction like this looked overdue. This one has dealt a severe hit to some of the most overheated corners of the tech markets. Some of the emerging tech giants of recent years such as Nvidia and Salesforce, are off more than 20 per cent. But the impact has been far from uniform, and it is too early to tell if this is anything more than a short-term adjustment that sets a floor for another bounce.

Big Tech’s defensive qualities have again stood out. Through good economic times and bad, Wall Street has decided that backing this handful of companies is like putting money in the bank. Thanks to Apple’s end-of-year rally, the overall value of the five (which includes Microsoft, Alphabet, Amazon and Meta) has retreated only slightly since early November, when the tremors first passed through other parts of the market.

At least this much about the long tech rally remains true: the concentration in market leadership among a handful of stocks is only becoming more pronounced. Whatever lawmakers and regulators may dream of doing to reduce their power, investors have decided that Big Tech’s share of the industry’s profits is just going to increase.

The story looks very different elsewhere. The Nasdaq has dropped 10 per cent from its early November record, and high-growth stocks have done considerably worse. The Bessemer emerging cloud index — a collection of 58 fast-growing software companies that have been among the most highly valued in the tech boom — has retreated 27 per cent over the past two months.

At the same time, what passes for value in the tech world has largely gone unscathed. Intel and IBM may face serious challenges, but shares in both are up since November.

The main questions now are: how far does this adjustment have to run? And has something fundamental changed about the stock market’s attitude to tech that will filter through into a profound shift, putting a brake on the capital flooding into the sector and forcing a rethink of more expansive business plans?

The prospect of rising interest rates has been the proximate cause of the retreat. The stock market’s knee-jerk reaction is always to mark down high-growth companies, whose profits lie further ahead. But it is unclear if anything much is different in the business outlook for them — particularly if the rate outlook itself reflects a belief in stronger economic growth ahead.

That said, there is certainly room for more air to leak from the market. Even after the recent reset, the emerging cloud index is up 934 per cent since it began in 2013, compared with a 185.4 per cent rise in the S&P 500 over that time. The 58 software companies now have a combined value of $1.9tn — and that does not include Microsoft, which alone is worth $2.35tn.

The average software stock trades at about 12 times revenue, or a 50 per cent premium to the average multiple over the past six years, according to analysis by Jefferies.

Many of these companies are likely to report falling growth rates this year, further testing the market’s resolve. After a jump in demand during the pandemic, when customers bought software to keep operating remotely, there are valid questions about how much spending was brought forward from future years, and to what extent companies will pause their digital overhauls to work through the changes already set in motion.

Comparisons with the strong start that many tech companies reported in early 2021 will also bring year-on-year growth rates down.

This sets up a more cautious period ahead in the public markets, However, it does little to dent the strong secular forces that have supported the sector’s rise, from the shift to the cloud to the rise of online shopping, working and entertainment. And private market investors, who have come to play a much bigger role in fuelling the latest generation of new growth companies, generally respond more slowly to changing stock prices. According to CB Insights, global venture capital investment doubled last year from what was already a record level, representing a wall of money that continues to pump up valuations.

The year has got off to a shaky start, and there is plenty of scope for the market to take a bigger bite out of the most inflated valuations. But it is far too early to say that the January adjustment represents a deeper shift in the tech industry’s fortunes.

richard.waters@ft.com

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