Oct 28, 2022 - Economy

Interest rates yank Wall Street moon shots back down to Earth

Illustration of a rocket ship being pulled back by a lasso

Illustration: Annelise Capossela/Axios

As the leaders of Ford Motor and Meta are finding out, high-interest rates have changed the capitalist calculus for big bets on money-losing projects.

Why it matters: Low rates make speculative, long-shot bets far more attractive. High rates kill investors' tolerance for such investments.

What's happening: Shares of social networking giant Meta crashed Thursday in part because its floundering virtual reality environment lost nearly $4 billion, with the red ink still to grow "significantly."

  • The stock suffered its second-worst single-day drop on record, collapsing by nearly 25%.
  • Separately, Ford — which posted a loss Wednesday — saw its shares go up after shuttering Argo AI, the autonomous driving startup that it had invested billions.

Flashback: This is a big shift from pandemic-era investor sentiment.

  • From March 2020 until early this year, shares of highly speculative tech companies — which often lost gobs of money — were the hottest stocks to own.
  • The tech-heavy Nasdaq composite consistently outperformed the S&P 500 over that period.
  • Investments that specialized in emerging, unprofitable technologies — such as Cathie Wood's Ark Innovation ETF — became market darlings.

How it works: As we've written a bunch, interest rates — basically, yields on government bonds — exert a gravitational pull on stock prices.

  • That's because these yields are key inputs into the models that virtually everyone in the world of investing uses, at least to some extent, to estimate the right price for assets like stocks.
  • Investors decide what to pay for stocks in part based on what they think companies can expect to make in future profits.
  • They then develop a "present value" for the investment — essentially what they're willing to pay today to lay claim to those profits — using interest rates.
  • Low rates make those future profits more valuable, meaning you'll pay a higher price for them today.

That's something we saw a lot over the last couple of years of market lunacy, as people poured money into SPACs, crypto, NFTs, money-losing meme stocks, nonexistent electric vehicle technology, multibillion-dollar valuations on venture-funded unicorns ... we could go on.

  • Since investors were rewarding such speculative ventures with soaring stock prices, stable, slightly boring companies like Meta and Ford tried to get into the act — emphasizing the speculative technology bets they too were making.

The bottom line: High-interest rates have changed the rules of the game. Ford seems to have gotten the memo, and the market is rewarding it for suddenly shuttering its AI unit.

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