Tech Dread Returns As US Yields Forget Pandemic

It was back to hand-wringing over rising rates Tuesday, as the US came back online after a long holiday weekend.

Two-year Treasury yields jumped above 1% for the first time since February 2020 (figure below), and 10-year yields touched 1.85%. As I put it here, it’s all about Fed speculation. For equities, the primacy of rates in the market zeitgeist means style-, factor- and thematic- concerns will remain topical.

10-year German yields flirted with positive territory. A sustained move above zero for bunds would be the first since May of 2019.

Needless to say, the relentless surge in yields put pressure on tech shares. The Nasdaq, already down 4% in 2022, was poised to be singed anew, while the SX8P led losses in Europe.

“At face value, the performance of the Nasdaq 100 hasn’t been that bad since last summer [but] under the hood, things have been going worse,” Capital Economics remarked, flagging a generalized narrowing in the US equity market, while simultaneously noting that they’re “not convinced that this heralds an imminent collapse.”

Across the pond, the Stoxx 600 tech gauge was on track to fall more than 2% for the third time this year (figure below).

Although European equities are generally seen as safer at a time when duration worries are pervasive stateside, rising real yields are a threat to tech. The Stoxx 600 Tech Index’s forward multiple is tightly linked to real yields.

The latest edition of BofA’s European Fund Manager Survey showed the net proportion of respondents who think monetary policy is too loose globally rose to a 20-year high of 69%. 56% said policy was too stimulative in Europe, where traders briefly penciled in a September rate hike from the ECB on Monday.

Although 81% of participants in BofA’s poll said European equities will likely rise by at least 5-10% in 2022 (with almost 40% saying the bull market will persist at least until Q4, up sharply from 28% last month), questions around positioning showed tech falling out of the top three to an underweight position for the first time in years (figure below).

As the bank’s Andreas Bruckner and Sebastian Raedler noted, the net proportion saying they’re overweight banks hit a new record high. The figure on the right (above) shows investors believe tech is very rich.

But, generally speaking, Wall Street strategists are finding it difficult to jettison tech in their asset allocation. “On the sell-side, the sector remains a favorite,” Bloomberg’s Michael Msika remarked on Tuesday, adding that “analysts see returns of more than 20% over the next 12 months, near the highest upside seen since April of 2020.”

As for equities more broadly, some are undaunted. “EPS growth projections by IBES for Q4 are lower than what was the case in Q3, but at the same time there was an improvement in PMIs, opening the door for another quarter of positive surprises,” JPMorgan’s Mislav Matejka said. The figure (below) illustrates the point.

“Strong GDP growth this year, above trend at 4.6% [in Europe], will help drive this,” he went on write, in the same note.

Matejka said that, in JPMorgan’s view, 2022 earnings growth will be “strong, and meaningfully above consensus, at 20% YoY for the Eurozone” compared to the 7% IBES sees.

The fundamentals, some believe, are sound.

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2 thoughts on “Tech Dread Returns As US Yields Forget Pandemic

  1. Equities are already down for the year based on central bank tapering and expected interest rate increases. I cannot fathom how anyone expects the economy to perform strongly with the central bank IV being slowed if not completely removed. It’s almost as if analysts haven’t accepted the reality that the global economy is directly tied to central bank policy!

  2. It’s funny that now analysts are talking about “fundamentals” when it comes to tech. A few weeks ago it was all about how low interest rates could keep a P/E ratio about 2X the historical mean (business fundamentals weren’t the main factor). We’ll see investors’ true appetite for tech once we reach peak Central Bank hawkishness.

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