Why are tech stocks so volatile?

Have you ever thought about why tech stocks can be so unpredictable? Recently, shares in Nvidia, a well-known chipmaker, have dropped significantly since the beginning of this year. You might be familiar with Ford, the famous car manufacturer, but did you know that there were many other car companies that didn’t succeed? Companies like Abbot-Detroit and Aerocar are not well-remembered because they went out of business early on. Just like we remember Ford for its success, we often only recall the tech companies that thrive. Many investors backed the wrong companies a century ago and lost their money. This situation is quite similar to what is happening in the tech industry today. Over the past year, tech stocks have been extremely volatile, with their prices resembling a rollercoaster ride. This volatility has occurred even before President Trump’s tariffs caused broader stock declines. Elroy Dimson, a finance professor at the University of Cambridge, explains that we are uncertain about which tech firms will ultimately succeed. He states, 'If you go back to the beginning of the last century, there were numerous car companies, and it was evident that automobiles would revolutionize the world. However, almost every company went bankrupt, and it was unclear which one to invest in. ' Not all high-tech businesses are currently profitable. When we evaluate investments in stocks, we consider two main factors: the growth in profits or dividends and the increase in the value of the shares. Some traditional companies provide steady dividends and see their stock prices gradually rise. However, many tech companies do not distribute dividends at all. Instead, they are reinvesting their earnings to foster future growth, which causes their stock prices to fluctuate based on expectations of future profits. Susannah Streeter, the head of money and markets at Hargreaves Lansdown, a UK financial services firm, explains, 'Tech shares are more volatile; they have high valuations, and their price-earnings ratios are very high. Growth stocks are more sensitive to changes in interest rates. ' Investors in these shares are essentially betting on 'not jam today but jam tomorrow. ' They are trying to identify the next big winner, not the company that pays out profits now, but the one that will eventually yield substantial dividends in the future. Consequently, any news or indication that future growth may not meet expectations can lead to a sharp decline in share values. Conversely, positive news can drive share prices up, even if current profits or losses remain unchanged, as investors flock to what they perceive as the future winner. The volatility of these shares arises from the fact that they are not supported by current profits or dividends. As Prof Dimson notes, 'small changes in growth expectations can lead to significant changes in share value,' which can impact numerous companies simultaneously. 'You have companies that are reasonably similar, so when growth rates change, it affects quite a few companies in a similar way,' he explains. This situation is reminiscent of the dotcom boom at the beginning of the 2000s, where companies with enormous growth potential emerged. When those growth prospects vanished, many of those companies also disappeared. Furthermore, there are not many truly large high-tech companies today. In the United States, they are often referred to as the 'magnificent seven' - Nvidia, Alphabet (the parent company of Google), Amazon, Apple, Microsoft, Meta (the parent company of Facebook), and Tesla. It doesn’t take much to unsettle the market, especially since several of these firms are relatively young and dominate sectors where previous leaders have failed. For instance, Tesla is facing challenges from potential customers who are unhappy with Elon Musk’s involvement in President Trump’s administration and from strong competition from Chinese electric car manufacturers like BYD. Meanwhile, Nvidia experienced a sharp decline in its share price at the start of this year following the emergence of a Chinese artificial intelligence chatbot called DeepSeek. This app was reportedly developed at a fraction of the cost of its competitors, raising concerns about the future of American AI dominance and the scale of investments that U. S. firms are planning. Nvidia is particularly concerned because it is a leading manufacturer of microchips for AI processing. AI has become the most significant trend in technology, with many companies claiming that AI is transforming their industries, products, and profits. However, not all AI firms can succeed, as Robert Whaley, a finance professor at Vanderbilt University in Tennessee, points out. 'AI is certainly contributing to tech volatility. The race is on. ' This means that AI shares are sensitive to predictions, and any indication that a specific company is falling behind in the AI race may lead many investors, most of whom lack a deep understanding of the subject, to abandon it for another company that appears to be ahead. Additionally, some investors seem indifferent to which companies' shares they purchase, as long as they are part of the booming high-tech sector, as they are speculating and diversifying their risks. In summary, share prices do not always provide a rational measure of a company's value, especially in the high-tech sector, or even of its future prospects. Instead, they can reflect the optimism of investors. However, this optimism is often fleeting, temporary, and subject to trends. Sometimes, optimism confronts reality or simply fades away. In essence, the tech market is highly volatile.