Information technology, a popular investment sector around the world, is currently in jeopardy. Mega Cap technology shares, which have led global equity rallies throughout the pandemic, may be concerned about their high valuation in the face of rising US yields and increased regulatory scrutiny.
Year to date (YTD), Apple, Amazon, Facebook, Google, and Netflix stock prices have increased by 7.5 percent, 0.8 percent, 25%, 55.5 percent, and 13.5 percent, respectively. According to the Nasdaq 100, technology stocks have outperformed the market by nearly 14 percent year to date. Despite this, it appears that the 2020 rally in these stocks has been pushed to the sidelines.
These tech stocks’ prospects are bleak in light of rising US yields. Any further rise in the US 10-year Treasury yield, as it did in June, could put a damper on the recent tech rally.
The question is, how do rising yields affect the tech industry, or any industry for that matter? When Treasury yields rise sharply, investors flee high-value stocks because their long-term earnings gains lose value as interest rates rise. The 10-year Treasury yield is used to calculate future cash flow present values. The more you earn, the less money you have.
Here’s a chart comparing the Nasdaq 100’s YTD movement to the 10-year US Treasury yield
Things, however, may not be as simple as they appear at first glance. High-quality corporate balance sheets with future growth potential can sometimes overshadow the impact of rising yields. Because of their strong balance sheets, powerful profit engines, and stable business models, technology leaders have survived turbulent times, transforming them into a quasi-safety trade.
Sector rotation in a portfolio, on the other hand, should not be ruled out entirely. On Wall Street last week, value stocks outperformed growth stocks, and most industries gained, with energy being the biggest gainer and the only industry to gain for the week. Among the high achievers were communication services, finances, and materials. Utilities, for example, outperformed consumers and healthcare.
According to FactSet, the market had some reservations last week about the long-standing buy-the-dip mantra’s tenacity. Bears have plenty of ammunition, but there is some optimism about the upcoming Q3 earnings season, a long runway until interest rates rise, an improving Covid backdrop, better October/Q4 seasonality, and stabilising economic indicators (including today’s improvement in September ISM manufacturing). The Bears have a lot of ammunition, but there is still hope.
The top technology companies in the United States are expected to report higher earnings in the coming quarter. Apple, Amazon, and Facebook are among the top-performing US stocks currently trading at low prices, making them appealing long-term investments. Despite rising interest rates, global investors may be drawn to these mega-tech stocks by their growth and earnings prospects. In the long run, any price correction or drop can be used to accumulate growth stocks.
Leave a Reply