Tech stocks are facing a challenging start to October as a surge in interest rates prompts investors to shift away from riskier assets. The Nasdaq, heavily weighted towards tech stocks, fell 1.9% on Tuesday, following a 5.8% decline in September. Although the Nasdaq is still up 25% for the year, it is trading at its lowest level since May.

Airbnb shares experienced a significant drop of 6.5%, the second-largest decline this year, following a downgrade by analysts at KeyBanc. The analysts shifted their rating to the equivalent of a hold from a buy, citing lower adjusted earnings expectations through 2025 as consumer preferences shift towards physical goods.

The broader tech sector, viewed as a growth engines during the pandemic, has faced headwinds in recent times. Rising interest rates and concerns about high energy prices and the potential for a recession have led investors to rotate out of tech stocks.

Higher bond yields have provided fixed-income opportunities for money managers while raising borrowing costs for consumers. The 10-year Treasury yield recently traded at 4.8%, reaching its highest level in 16 years. This surge in benchmark yields comes as the Federal Reserve signals a commitment to keeping interest rates at elevated levels for an extended period.

Amazon suffered the steepest drop among mega-cap tech stocks, falling 3.7%, as the company grapples with concerns about a potentially disappointing holiday shopping season and a massive antitrust lawsuit from the Federal Trade Commission. Other major tech players, including Microsoft and Meta, also experienced declines of 2.6% and 1.9%, respectively. The tech sector’s performance will likely continue to be influenced by interest rate dynamics and broader economic conditions in the coming months.

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