Technology stocks have struggled to maintain upside momentum, with 10-year T-note yields hovering around 4%. A measure of the inverse correlation between yields and the Nasdaq 100 Stock Index ($IUXX) (QQQ) rose to its highest in 9 months last week. This year’s artificial intelligence-fueled rally in technology stocks has pushed the Nasdaq 100 up more than +38% this year. However, a sustained move in the 10-year T-note yield above 4% may derail the rally in technology stocks.
Higher interest rates are a significant headwind to a sustained rally in technology stocks. The aggressive interest rate hike campaign by the Federal Reserve sent bond yields soaring last year and pushed the 10-year T-note up to a 15-year high of 4.335%. That pummeled the Nasdaq 100 Stock Index, which lost -33% in 2022, its worst yearly loss since the financial crisis. 10-year T-note yields back above 4% are beginning to bite technology stocks again as the higher yields hurt the present value of distant profits and raise the cost of financing operations.
This year’s rally in technology stocks has been fueled by the artificial intelligence (AI) craze, pushing the Nasdaq 100 up close to its record high last month, even with bond yields rising. The current rally in technology stocks has pushed valuations so high that even a strong Q2 earnings season has failed to push tech stocks higher. After five months of gains, the Nasdaq 100 has struggled this month. The Nasdaq 100 is down about 5% since posting a 1-1/2 year high on July 19.
When interest rates rise, speculative technology stocks are more disproportionally affected than other sectors as they rely more on debt to fund operations. However, higher rates also undercut mega-cap technology stocks like Microsoft, which is down 10% since mid-July. Mapsignals said, “On the menu of macro worries, rising 10-year yields are at the top of the list.” The Nasdaq 100’s valuation has fallen to about 25 times projected profits, from 27 times last month, but is still well above the 10-year average at 21 times.
Last week’s rise in the 10-year T-note yield to a 9-month high of 4.204% has weighed on technology stocks and knocked the Nasdaq 100 down to a 4-week low on Wednesday. However, today’s benign U.S. July CPI report may prompt the Fed to pause its rate hike campaign, which could keep T-note yields from rising and support technology stocks. Many analysts and investors are still bullish on the tech sector, expecting AI to boost earnings growth in coming quarters, making tech stock valuations more attractive. Huntington Private Bank said, “So a lot of the valuations, even though they’ve run up a decent amount, still aren’t that bad relative t growth, particularly if you know the current buzzword of the day, AI.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
