Companies hit the brakes on deal-making during the first half of 2022 as concerns over pervasive inflation, interest rate hikes and the threat of a recession loomed over Wall Street.

Overall, companies announced $2.2 trillion worth of buyout deals in the first half of the year, a 21% drop from a year earlier. The number of deals also fell, dropping 17% during that period according to Refinitiv. It’s the slowest start to the year for deal-making since the pandemic stunned markets in 2020.

Some of the biggest deals, such as Microsoft’s $69 billion purchase of game maker Activision Blizzard, were announced early in the year, before the long list of worries really started weighing on Wall Street. The tally also includes Elon Musk’s $44 billion takeover bid for Twitter, announced in April but now uncertain to go through.

Recession concerns have hampered deal-making, but worries about higher interest rates have also played a key role in crimping activity. Higher interest rates make deals, much like overall borrowing, more expensive and tend to make companies more cautious about pursuing big purchases.

“Higher interest rates, by definition, cause the discount mechanism to fade,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “If you believe interest rates are going to trend higher, the goal is to get the deal done before then.”

The Federal Reserve had kept rates at historic lows to goose economic growth during the pandemic. That helped fuel gains for the stock market as well as a surge in M&A activity. Now the Fed is aggressively raising rates to help temper inflation by slowing economic growth. Wall Street is worried that the Fed could hit the brakes too hard on an already slowing economy and send the economy into a recession.

Technology sector deals, which are typically among the biggest, totaled $531 billion in the first half, a 19% drop. The sector has been hit particularly hard by concerns about rising interest rates, which make pricey stock valuations less attractive to investors.

Analysts expect companies and investors to remain cautious until they see inflation easing enough to prompt the Fed to soften their rate increases.

“We’re kind of in an inflection point,” said Matt Toole, director of deals intelligence at Refinitiv. “But, M&A has proved to be a very resilient area of the market from a value and volume perspective.”

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