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Tech Stocks Grapple with Yield Surge: Market Update

Hello,

 

In the ever-volatile world of markets, the age-old adage of “what goes up must come down” rings true. As Treasury yields continue their upward trajectory, the red-hot tech sector is grappling with a downward spiral.

 

Since the start of this month, the Nasdaq Composite has experienced a dip of approximately 4.2%. Prominent tech giants like Apple (AAPL) and Nvidia (NVDA) are hovering on the brink of 10% declines for the month. Even the mighty Microsoft (MSFT), with all its artificial intelligence allure and partnership with OpenAI, has seen a 4% decrease in August. Google (GOOG, GOOGL) has also experienced a 2.1% drop.

 

Amidst this pullback in the tech sector, Amazon (AMZN) stands out as the exception, with a 4% increase in its stock price. This could possibly be attributed to reports suggesting that the company is monitoring the productivity of its office-bound employees. Elevated productivity could translate to increased profits for Amazon, a prospect that investors find irresistible.

 

This decline in tech stocks coincides with the 10-year Treasury yield’s climb from around 3.95% at the end of July to above 4.1% at present. To provide context, back in early April, yields were hovering around 3.3%.

 

The reasons for this trend are multifaceted: blame it on Fitch’s downgrade of the US credit rating prior to a wave of US debt issuances or the scaling back of inflation leading to a redirection of funds into higher-risk segments of the market. Regardless of the cause, the trend of higher yields could be a lasting one, and this spells challenging times for tech investors.

 

In fact, industry chatter suggests that yields might have further room to ascend.

 

RenMac’s strategy team, in a recent client note, suggested, “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 longstanding principle that tech stocks are not fond of elevated yields holds true. The challenges brought on by higher borrowing costs, more attractive cash returns, and the pressure to provide aggressive discounts on future growth are hurdles that tech giants must navigate as interest rates rise.

 

Keith Lerner, a perceptive market observer at Truist, weighs in, stating, “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.”

 

Lerner goes on to explain, “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%.”

 

Tech enthusiasts, tread cautiously as the yields remain above the 4% threshold. The dance between tech stocks and Treasury yields continues, revealing a complex interplay within the market.

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