Big Tech's stock market leadership threatened by rising rates

San Francisco

MEGACAP technology stocks rallied through a global pandemic, fears of a bubble and rising regulatory scrutiny. But the bond market could be the hurdle that finally trips them up.

Apple, Microsoft, Amazon.com, Alphabet and Facebook, the five largest US companies, have delivered reliable outsized gains to shareholders for years. Last week was different, as a selloff erased more than US$300 billion from their combined market value and sent the Nasdaq 100 to its worst week since late February. The reason? A sudden spike in Treasury yields that sent tremors through Wall Street, causing investors to flee stocks with the highest valuations because their distant earnings gains will be less valuable as rates rise.

Investors have been warning for months that US bond yields were bound to rise with inflation climbing and the Federal Reserve preparing to rein in its asset purchases aimed at stimulating the economy. Now that those predictions are starting to come true, the big question on Wall Street is what kind of bond-market action could trigger more bleeding.

The 10-year Treasury yield rose above 1.5 per cent last Monday, the first time it's done so since June, and settled at 1.47 per cent last Friday. Those rates are used to discount the value of future cash flows. The higher the yields go, the less those profits are worth now.

For Ted Mortonson, a technology strategist at Baird, the next important level to watch is the March closing high of 1.74 per cent. A roughly 50 basis point advance in the yield in February helped fuel an 11 per cent swoon in the Nasdaq 100 Stock Index and revisiting that level could play out in a similar fashion, he said.

Others argue the speed of the advance is the most critical factor. After trading in a roughly 10 basis point range for most of the past two months, the 10-year yield jumped more than 20 basis points in four days beginning on Sept 23.

"The sharpness of the move on the Treasury yield caught the market off guard," said Keith Lerner, co-chief investment officer at Truist Advisory Services. He thinks it's only a matter of time until the 10-year yield tests its March high. "The general direction is still higher, which I think means that tech will continue to struggle."

Wall Street remains overwhelmingly bullish on megacap tech. All 58 analysts who cover Amazon.com have buy ratings, despite the fact that its shares are now flat for the year. Apple, the second worst-performer in the group with a 7.5 per cent advance since the start of the year, has buy ratings from three-quarters of analysts.

The five companies are each projected to report quarterly revenue growth of 16 per cent or more in the upcoming earnings season, according to the average of analyst estimates compiled by Bloomberg. In particular, Apple, Alphabet and Facebook are expected to post more than 30 per cent increases in revenues from the same period a year ago.

It's that growth and earnings power that will continue to draw investors to tech megacaps even with higher interest rates, according to Anthony Saglimbene, global market strategist at Ameriprise Financial. He's been advising clients to buy quality technology stocks on pullbacks. Many investors did just that last Friday, sending Microsoft and Alphabet shares up more than 2 per cent. BLOOMBERG