What goes up must eventually go down.
And in the case of markets right now, Treasury yields are still going up and hot tech stocks are finally coming down.
So far this month, the Nasdaq Composite is off by about 4.2%. Top tech names such as Apple (AAPL) and Nvidia (NVDA) are teetering on 10% drops for the month. Mighty Microsoft’s (MSFT) stock — for all the company’s AI sizzle and love affair with OpenAI — is off by 4% in August. Google (GOOG, GOOGL) has shed 2.1%.
The only big-name tech stock working higher this month is Amazon (AMZN) (up 4%) — maybe because it’s reportedly tracking whether workers back in the office are actually working. More productivity means more profits for Amazon (maybe), and there’s nothing investors love more.
The pullback in tech coincides with the 10-year Treasury yield rising from about 3.95% in late July to above 4.1% today. Yields back in early April were around 3.3%, for perspective.
Blame Fitch’s US credit rating downgrade prior to an avalanche of US debt issuances or the retrenchment in inflation sending cash into higher risk areas of markets. Whatever it is, higher yields could be here to stay for the time being, and that spells bad news for tech investors.
In fact, there is chatter on the Street that yields may have further room to run.
“Despite rising odds that the Fed will pause at the September meeting, yields remain firm. Without taking any factors into account and just looking at the chart, yields do not look like a top to us and look poised to retest the highs from 2022. The 10 and 30-year have been making higher highs and higher lows since April and we’d need to see at least a lower low before suggesting a top may be in-place,” the strategy team at RenMac wrote in a new client note.
The old rule of thumb is that tech stocks don’t like a land of elevated yields. Higher borrowing costs, more attractive returns on cash, and more aggressive discounts future growth are all part of the challenge facing tech highfliers when interest rates rise.
“Our view is these higher rates, as we stay above the 4% level, will serve to put a cap on further valuation expansion. This had been a key driver of stock returns this year,” the always astute market watcher Keith Lerner at Truist tells me.
Added Lerner, “Already stocks are trading at the highest valuation level of the past 20 years, outside of the pandemic overshoot, which coincided with the Federal Funds rate at zero as opposed to above 5% today and a 10-year yield below 1%.”
Tread carefully, tech fans — at least until yields back up to below 4%.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].
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Source: https://finance.yahoo.com/news/tech-stocks-have-a-yield-problem-morning-brief-100009783.html