Technology stocks are staging a comeback this week from their high selloff point. At the moment, it appears as though these stocks are finally having their day in the sun again, after a bad run.
The technology-heavy Nasdaq Composite gained more than 3% this week alone, as it navigates itself out of correction territory. The index is still down roughly 10% from its November 19 highs, although it had previously fallen as much as 17% from that level in late January.
For the most part, rising bond yields caused the correction as the markets expect a lift in interest rates from the Federal Reserve in order to combat inflation. The Fed is also expected to cut down the size of its balance sheet, which would mean less money flowing into the bond market- another factor contributing to the slipping bond prices and rising yields.
The 10-year Treasury yield reached a pandemic-era closing high of 1.96% earlier in the week, compared to 1.55% on Nov.19. Higher long-dated bond yields might be less attractive as they make future profits less valuable- and most tech companies are valued based on their expected profits down the line.
The tech stock’s recovery can be attributed to three main factors. The first is the fact that bond yields are taking a break from surging. The 10-year yield backtracked from its Tuesday high, trading recently at 1.94%. Although this is still at a high level, investors must be relieved to see the yield finally go somewhere besides up. It could also be a sign that tech stock’s valuations are at the end of the plummeting line. The Nasdaq’s aggregate forward price-to-earnings ratio has dropped 28.3 times from 32.7 times on November 19.
Higher than expected earnings could have the effect of lifting these large market-cap stocks. Fourth-quarter earnings for S&P500 tech companies, in total, have surpassed analyst estimates by 8.6% so far, according to Credit Suisse data.
Meta Platforms (ticker: FB) and Netflix (ticker: NFLX) might have released disappointing earnings reports, but those were the result of company-specific problems. Earnings from Amazon (ticker: AMZN), Snap (ticker: SNAP), and Alphabet (ticker: GOOGL) more than impressed investors.
“Despite the headlines on Meta and other visible tech companies, fourth-quarter earnings for the sector are coming in really well,” said Dave Donabedian, chief investment officer of CIBC Private Wealth Management.
The result of this is that investors are now allocating more money to tech stocks in their portfolios after dumping the same shares in January. Although these developments are a sign of the positive sentiment towards tech stocks, it still remains to be seen whether the recovery will stick in the upcoming weeks. The 10-year yield could restart its rise and move above 2% as annual inflation for the longer term is expected to be above 2% (investors typically demand a rate of return higher than the inflation rate.) This means earnings multiples might have a little more room to decline from this point as well. Investors are now only cautiously buying names in the sector to further explain this fact. “I don’t think there’s any real desire for anyone to take a high-conviction view right now,” says DeBusschere.