Selloff in Tech Stocks Gathers Pace as Bond Yields Climb

(Bloomberg) -- The stampede out of expensive technology stocks may be far from over as bond yields -- the biggest threat for high-flying growth shares -- mark new post-pandemic highs.

The $1.5 trillion rout in the Nasdaq Composite Index in the first week of 2022 has sent some of the most pricey stocks down 10% or more, but the decline in benchmark indexes from last year’s records has yet to reach double digits. ZScaler Inc., Crowdstrike Holdings Inc. and Datadog Inc., which trade at more than 200 times forward earnings, lost roughly 30% from their record highs.

“We’ve never seen stocks this expensive for the overall market, which means valuations are likely to come down more before we’re through with this correction,” Morgan Stanley’s Michael J. Wilson wrote in a note to clients. For Wilson, the worst-hit software stocks should underperform even more on falling expected earnings and overall, stocks “still have material downside” before the pullback is over.

Indeed, the Nasdaq 100 Index is down 1.7% Monday as yields on U.S. 10-year Treasury notes approach 1.80%. The tech-heavy index has lost 7.5% since late last year, mainly pulled down by software companies: An iShares exchange-traded fund tracking software stocks has fallen 18% from a November peak. 

Software has been among the hardest hit on fears that higher interest rates will continue to eat away at valuations that are based on profits expected to be delivered far into the future. Wilson said he wouldn’t recommend investors enter the sector until fourth-quarter results provide clarity as to whether earnings revisions have bottomed out. 

The big risk for highly valued stocks is that inflation, and thus rates, spike even more than currently forecast. Yields  “can go much much higher,” Mark Mobius, the veteran emerging markets fund manager, said in an interview on Bloomberg Television. Investors won’t be buying Treasuries if their yields are far below the rate of annual inflation, which economists expect to come in at 7% for December, he said.

While JPMorgan Chase & Co. strategist Mislav Matejka and his colleagues see the broader market withstanding rising bond yields, they say it may be a rougher road for tech stocks. The sector will “struggle to outperform going forward,” they wrote in a report Monday.

For Bank of America Corp.’s Michael Hartnett, the biggest winners during the pandemic’s central bank easing era are at the biggest risk in a bear market. He highlighted big tech, including Apple Inc., Amazon.com Inc., Google owner Alphabet Inc., Facebook owner Meta Platforms Inc. and Microsoft Corp. . The quintet are down 6% to 13% from their respective tops. 

Plenty of optimists say those megacap stocks will hold up. “There is an opportunity to start rebuilding positions in big tech stocks,” said eToro global market strategist Ben Laidler. “Their combination of good growth, high margins, fortress balance sheets more than justifies valuations, makes them core positions, and stocks for all weathers.”

Tech Chart of the Day

Since Apple briefly breached the $3 trillion market value on an intraday basis, it’s all been downhill for the world’s largest publicly listed firm. That shouldn’t come as a surprise, as there were similar moves when the stock broke through both the $1 trillion and $2 trillion thresholds for the first time. After reaching the first trillion in 2018, the shares corrected 40%, while a 20% drop came soon after the second trillion was breached last year.

Top Tech Stories

• Tencent is nearing a deal to acquire Chinese gaming handset maker Black Shark, a move that could help further its ambitions for the metaverse, people with knowledge of the matter said
• China’s New Oriental Education & Technology fired tens of thousands of employees, the biggest layoffs disclosed since China embarked on a wide-ranging crackdown on private enterprises
• Intel is on the brink of losing its status as the world’s largest chipmaker. For the first three quarters of 2021, Samsung Electronics held a narrow lead in sales
• Chinese technology shares extended their rallies into a third session, amid signs that bargain hunters are piling in after a key gauge for the sector dropped to a fresh low last week
• Foxconn will gradually resume operations at a plant in India that makes iPhones for Apple, as it begins to address workers’ protests over sub-standard living conditions
• Amazon has filed an appeal against India’s antitrust body’s decision to suspend approval of the company’s 2019 agreement with Future Group, Reuters reports

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