Want to know where the world’s biggest technology stocks are heading? Just watch one of the oldest measures there is: the bond market.
That’s increasingly the refrain from some investors after a season of surging corporate earnings did relatively little to push the likes of Apple Inc., Facebook Inc. and Netflix Inc. much further ahead.
There are few major catalysts seen on the immediate horizon to elevate the already record-setting stock prices of the U.S.’s technology giants, with the surging Delta variant dominating the outlook for everything from commodities to emerging market bonds.
So a coterie of Wall Street analysts and investors are turning to Treasury yields for clues.
Those yields may be used in mathematical models to discount into today’s dollars the value of earnings companies won’t see for years. The higher those yields go, the smaller the present value of those profits may become.
While that affects all companies, it’s especially significant for fast-growing businesses whose stock prices are more dependent on the large earnings they’re expected to reap far in the future. The shares of such companies got an added boost following the onset of the pandemic as the Federal Reserve’s effort to head off an economic collapse sent Treasury yields tumbling, making those future profits look even more attractive.
“If rates go up, they will underperform,” Aash Shah, senior portfolio manager with Summit Global Investments, said of the biggest tech stocks. “That’s nothing against their business, just a reality of discounted cash flow.”
The interplay between technology stocks and Treasury rates is nothing new, of course; the rise in yields over 2018 contributed to an outsize rout in the Nasdaq 100 Index late that year, for example. And other forces, like last year’s shift away from companies hard hit by lockdowns, have also played a major role in driving tech stocks.
Chris Murphy, co-head of derivatives strategy at Susquehanna International, said a rise in yields doesn’t necessarily pose a risk to tech stocks if economic growth stays strong. But that could be eclipsed if investors grow fearful about the expected pullback in the Federal Reserve’s bond buying program.
“If economic growth holds up, 10-year yields and the Nasdaq can rally together,” he said. “If the focus switches to the Fed tapering, then that’ll be bad for the Nasdaq and the relationship starts to become more negative.”