Tech stocks have become a mainstay in portfolios over the past year. However, given rising Treasury yields and the likelihood of monetary policy tightening in the near term, analysts expect tech stocks to experience significant volatility in the near term. In addition, generous tax breaks allowed when investing in tech startups are expected to be phased out by Democrats. Given this backdrop, we think it is best to avoid fundamentally weak—yet pricey—tech stocks Affirm Holdings (AFRM) and Farfetch (NYSE:FTCH). Read on.During the worst of the COVID-19 pandemic, most technology companies thrived, driven mainly by the switch to hybrid work structures and increased demand for digitization and automation. But rising Treasury yields and the possibility of monetary policy tightening sooner than expected could cause tech stocks to retreat in price in the near term. Furthermore, because tech stocks have become a mainstay in portfolios across Wall Street, there are concerns that they may be susceptible to violent market swings if investors try to sell all at once.
In addition, Democrats are seeking to cover their $3.5 trillion Build Back Better spending proposal by limiting the tax break that investors receive when investing in tech startups. If passed, the bill could curb the 100% capital gains exemption. Moreover, prolonged semiconductor chip and components shortages are creating production bottlenecks in several tech companies.
Given this dire backdrop, we think it might be reasonable to avoid fundamentally weak, and overvalued, tech stocks Affirm Holdings, Inc. (AFRM) and Farfetch Limited (FTCH).