Soaring bond yields challenge investor confidence in big tech companies

Rapidly rising government bond yields are hitting stocks of tech pillars that have propelled major indexes higher for years, straining investor confidence in some of the stock market’s most popular trades .

Even though this week’s slide was moderated on Wednesday, shares in software giant Microsoft Corp.

, the parent company of Google Alphabet Inc.

and chipmaker Nvidia Corp.

have fallen about 5% or more so far this week, dragging down major equity indices and funds that give companies with higher market values ​​greater influence. In collaboration with Apple Inc., Inc.

, Facebook Inc.

and Netflix Inc.

, the seven companies lost about $ 315 billion in market value on Tuesday, the biggest drop since last October, according to Dow Jones Market Data. The S&P 500 edged up 0.2% on Wednesday, but is still down 3.6% in September and on track for its biggest monthly decline in a year.

The recent reversal is accompanied by a rise in long-term Treasury yields at their fastest pace in months, pushing the yield on the benchmark 10-year US Treasury bond above 1.5% . Yields rise as bond prices fall and spill over into everything from mortgage rates to auto loans. The 10-year yield is at its highest level in three months, diminishing the attractiveness of tech companies.

The low yields are causing many investors to pay more for stocks of large tech companies which they believe will generate disproportionate profits in the future. Yields tend to increase when investors feel better about the economy, so their lead tends to boost stocks of companies that make more money and increase shareholder returns during times of global growth. So-called cyclical stocks are also cheaper.

Investors withdrew $ 1.2 billion from tech mutual funds and exchange-traded funds during the week ending September 22, the first such outing in about three months, according to figures from Bank of America from data provider EPFR Global. An outflow of nearly $ 29 billion from U.S. equity funds that week was the largest in more than 3.5 years, ending a string of steady inflows.

While similar moves in yields and tech stocks over the past few months have proven to be temporary, the latest swings come with many investors apprehensive about the prospect of higher interest rates. The recent bets on improving economic data and rising inflation come after the Federal Reserve signaled it could start cutting bond purchases in November and raising rates in 2022. Some analysts say changes in the economy caused by the coronavirus and supply chain disruptions could further boost inflation and interest rates.

The latest rise in yields has reversed bets that they will stay low and that tech leaders’ market values ​​will continue to inflate. Investors favored economically sensitive stocks as bond yields rose at the start of the year, then poured tens of billions of dollars into tech funds this summer as the so-called reopening of trade took off. blurred. Those who have recently crammed into tech stocks are now being forced to reassess those bets, analysts said.

“Many of them have not wanted to give up their positioning,” said Shawn Snyder, head of investment strategy at Citi US Consumer Wealth Management. For tech stocks, he said, “valuations stay high and they stay at risk when yields take those big rises.” He recommended that customers prioritize cheaper industries such as healthcare, but still expects tech companies to continue to grow steadily.

Many investors were already bracing for a pullback this fall after stocks rose for several months. The S&P 500 has not traded 5% below an all-time high in nearly a year, the longest such streak since February 2018, according to Dow Jones Market Data.

The recent market pullback comes with investors also worried about the impending collapse of Chinese real estate developer China Evergrande Group and a looming deadline for the US government to reach an agreement to raise the federal borrowing limit, or debt ceiling.

Gains in shares of and other internet companies have propelled major indexes higher for years, but investors are warning that declines in these popular stocks can also have a disproportionate impact on markets.


Tom Williams / CQ Roll Call / Zuma Press

Abrupt changes like those seen recently are of concern to market watchers, as the downward momentum can feed on itself, making the sell-off more severe. Many tech stocks have benefited from an explosion in options trading, which allows the holder to buy or sell an asset at a specific price in the future. Market makers who sell options to investors often hedge their positions by buying the underlying stocks, a force that can amplify stock price gains.

But when stocks fall, those same trends can bolster sales. Rising volatility and equity fund outflows can also trigger selling by trendy investors. Traders often use borrowed money to get juice returns. When stocks and bonds fall in tandem as they have been, liquidating those trades can cause others to pull out of their positions as well.

The signs of such a systematic sale are worrying for investors because they can punish both strong and weak companies.

“Everything is thrown out, which is why we are seeing some decline in technology in all areas,” said Leslie Thompson, managing member of Spectrum Management Group. She continues to favor large tech companies like Microsoft and Alphabet and said there are few attractive alternatives to owning stocks despite the recent rise in bond yields.

Since trillion-dollar companies such as Microsoft, Alphabet, Apple, and Amazon make up a significant portion of major indexes, sharp declines in these stocks can have a disproportionate impact on the stock market. Even though energy stocks are up 3.9% this week and financial stocks are roughly flat, the S&P 500 is down 2.2%.

While many investors remain convinced that strong earnings will support stocks, more sudden rate moves could lead to continued volatility, according to investors. This is especially the case with the Delta variant of the coronavirus scrambling recent economic data.

“There is a lot of caution about exactly where things are going from here,” said Mr. Snyder of Citi US Consumer Wealth Management.

Write to Amrith Ramkumar at [email protected]

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