The biggest enemy of growth stocks is inflation. Looking at rising bond yields, it seems like the beast is rearing its head these days.
Expectations of more economic stimulus from the Biden administration and positive signals about COVID-19 containment are pushing rates up globally, with the US benchmark at its one-year high of 1.39% at the time of writing. acts.
The rise in revenues largely reflects investors' expectations of a strong economic recovery. But if that happens, it could also force central banks to withdraw their monetary stimulus measures, making stocks the less favorable investment choice, especially high-growth technology stocks.
The largest US technology stocks, as represented by the FAANG group that includes Facebook (NASDAQ :), Apple (NASDAQ 🙂 and Amazon (NASDAQ :), are more vulnerable to rising bond yields following their explosive growth during the pandemic.
That is the main reason why these stocks are coming under increasing pressure as evidence of a strong economic recovery rises in the second quarter. The Invesco QQQ Trust ETF (NASDAQ :), which the company follows, with its top positions including Apple, Microsoft (NASDAQ 🙂 and Amazon, has underperformed in recent weeks. It fell over 2% on Monday after staying flat for a month.
Invesco QQQ Trust Weekly Chart.
The impact of potential and higher interest rates on stocks depends very much on how quickly returns can increase. A series of analysts predict that 10-year Treasury yields will be somewhere between 1.5% and 2% by year-end, as investors begin to prepare for future Fed rate hikes, according to a forecast by Wall. Street Journal.
The Most Worrying Result
As expectations of inflationary pressures grow, analysts have divergent views on their impact on stock prices. The most worrying outcome could be a repeat of 2013, when then Fed chairman Ben Bernanke's suggestion to wind down the asset purchase program spiked bond yields and stocks plummeted.
"The fear is that these assets will be priced to perfection when the ECB and the Fed could eventually wind down," said Sebastien Galy, senior macro strategist at Nordea Asset Management, in a research note entitled "Little taper tantrum". and quoted by CNBC. .com. "The likelihood of tapering is rising better in the United States after four months of disappointment and the expectation of major issues from the $ 1.9 trillion fiscal package."
Despite the prospect of some correction in high-flying growth stocks, conditions in the field remain very favorable for their companies. The shift to e-commerce, the increasing use of virtual offices and classrooms, and the increasing demand for the technology hardware are some of the trends that will continue. With that, there is currently no sign that the Fed will remove the monetary stimulus that provides a lifeline to millions of small businesses devastated during the pandemic.
Barclays' head of European equity strategy, Emmanuel Cau, says the yield curve is "typical of the early stages of the cycle."
As he said in a recent note:
“Of course, after the strong movement of recent weeks, equities could usher in a pause, as many sectors that have recovered with returns look overbought, such as commodities and banks. But at this stage, we think rising yields are more confirmation of the equity bull market than a threat, so we should continue to buy dips. "
Bottom Line
Growth stocks may see additional sell-off as bond yields continue to show some recovery from their historic lows.
But that should not be construed as a threat to high-profile technology stocks, which we believe are still in a bull market. Their fundamental growth story remains intact.
Proof of this came from the just-closed earnings season in which 95% of technology companies exceeded earnings expectations and 88% of them exceeded revenue expectations.
