Tech can’t seem to get out of its own way in an environment where investors are keen to push the reflation trade, many manifestations of which run directly contrary to the market zeitgeist that made growth stocks perennial winners in the “slow-flation” era.
While I’ve been loath to declare a bond “bear market” despite the technical threshold being breached during the first quarter on some benchmarks, the “duration infatuation” has most assuredly waned. Indeed, when you think “duration” these days, you automatically think “trouble” after the worst quarter for Treasurys in decades. This presents a problem for secular growth and other equities expressions which, for years, rode the bond bull market to staggering gains.
“Inflation” was “the word on everyone’s lips” during Q1 earnings calls, and it was similarly on tongue tips to kick off a week headlined by CPI stateside. That meant another egregious day for tech shares (figure below).
Notably (and my aversion to any kind of technical analysis notwithstanding), the FANG+ gauge is below its 100-day moving average. So is the SOX.
“Options in QQQ imply Dealers remained incrementally ‘short gamma versus spot,” Nomura’s Charlie McElligott said Monday, noting tech’s susceptibility to “accelerant” moves, as dealer hedging had the potential to exacerbate price swings.
Over the weekend, I noted that to shun big tech is akin to heresy, not because you should worship Apple or Amazon (and definitely not Facebook), but rather because everyone worships at the altar of growth. And FAAMG is where the growth lives.
That doesn’t mean buy every dip, but if you’re looking for confirmation bias when it comes to a deep-seated desire to remain overweight the heavyweights, you’ll never be entirely bereft.
For example, Goldman noted that even after Q1’s bond rout, US 10-year yields remain “extremely low” and that “support[s] the valuation of high growth, long duration stocks.” The bank’s David Kostin went on to say that FAAMG’s earnings yield gap is 191bps, well above the four-decade average and when valued on a growth-adjusted basis, “FAAMG actually trades at a 14% PEG discount to the median S&P 500 stock.”
Still, just because you can find a Linus blanket in growth metrics doesn’t mean there aren’t risks.
Higher capital gains taxes could disproportionately impact the FAAMGs, which have appreciated some $5 trillion in five years. And the duration risk is there, it’s just perhaps less scary than it seems. Our collective penchant for viewing bond yields in the context of (very) recent history makes us believe 2% on 10s is somehow “high.”
For Goldman, the biggest potential impediment to big tech isn’t rising bond yields or valuations, it’s regulatory risk. Kostin warned late last week that Facebook, Apple, Amazon and Google are staring down “a laundry list of legal battles and investigations.”
The bank’s year-end 2021 and 2022 targets for the S&P “assume these companies generate sales and earnings in line with consensus expectations, their relative valuations remain stable, and therefore implicitly that antitrust actions have no major impact.”
That underscores how crucial the FAAMG cohort is to the broader market. Assuming various antitrust investigations won’t be material may be a safe bet. Or it may not. But if you own the market through an index fund, you’re probably making the same bet. On a day when tech was again in the firing line, I thought that was worth a mention.