US Tech Rally Won’t Last, One Bank Suggests

If you’re searching for double-digit monthly rallies on benchmark equity indexes, a good place to start looking is bear markets.

Rebounds from oversold conditions — exacerbated by light positioning and, over the past decade, amplified by discouraging trends in market depth and liquidity — can be especially pronounced.

“There have been two primary catalysts behind this rally and the first is positioning,” JonesTrading’s Mike O’Rourke said. “The consensus outlook is negative and with good reason, so most institutional investors have fortified their portfolios.”

Systematic flows played a large role too. As stocks rallied through key trigger levels, CTAs covered and even flipped long. At the same time, options dynamics were in play, as puts bled out with spot sprinting away from downside strikes.

It was a squeeze, and a rather large one at that. The figure (below) illustrates the point made here at the outset. “Double-digit monthly rallies are rare outside of bear markets,” SocGen’s Andrew Lapthorne wrote Monday. “To rally so much, it helps to fall a lot beforehand.”

The Nasdaq’s gains were juiced by falling bond yields. Bad news was indeed good news. “[The] deteriorating economic outlook saw US 10-year bond yields drop by 45bps, the biggest monthly decline since August 2019, while German 10-year bond yields saw the biggest monthly drop since May 1980, so, the bond-yield-fearing Nasdaq duly rallied 12.4% during July,” Lapthorne went on to say.

Of course, it didn’t hurt that Apple, Amazon, Google and Microsoft all managed to report solid results, despite a chorus of dire prognostications.

Suffice to say Lapthorne doubts stocks are out of the proverbial woods. “Despite the usual manufactured ‘surprises,’ profit forecasts for the Nasdaq continued to be cut, with most of the cuts focused on the next two quarters,” he noted. The figure on the left (below) illustrates the point.

The problem — or the potential problem, at least — is that lower estimates now against resilient estimates later mechanically raises the expected growth rate (figure on the right).

There are two ways to look at that. One is just to suggest it’s accurate — that profit risk is confined to the next few quarters and that once the storm (or “hurricane“) is over, profits will reaccelerate. Another is to warn, as Lapthorne did, that the “build-up of growth expectations for next year” may presage “yet more cuts to come.”

You can choose your own adventure, but if you ask Lapthorne, the boost tech shares enjoyed from falling bond yields in July could prove ephemeral. Eventually, he said, “the focus should switch back to the poor profit outlook.”

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