Yesterday, yields surged while stocks sunk. Today it’s been the opposite. The market’s major indexes traded for moderate gains while the 10-year Treasury yield fell slightly. The Dow jumped higher, lifting the S&P in the process. The Nasdaq Composite lagged, by comparison, trading flat on the morning.
With a government shutdown looming, the focus has turned to yields in the meantime. And, because of those two major market influences, volatility continues to weigh heavily on traders as well.
“Higher bond yields post last week’s more hawkish [Fed], along with higher oil prices, stabilization in high-frequency economic indicators, and evidence that the latest COVID surge in the US has peaked, have pressured the Growth trade and bolstered the Value and Small Cap trades – a shift in leadership/ rotation that’s become yet another hurdle for the S&P 500 given the index’s heavy bias towards secular growth,” RBC Capital Markets’ Lori Calvasina said in a note.
“Our bottom line, we think choppy conditions in US equities will persist a while longer.”
Fundamentally speaking, Parrish Capital CEO Teddy Parrish believes Big Tech will fall further in the coming weeks.
“A lot of Big Tech is overpriced,” he said.
“Those valuations are going to have to go a little lower in one or two ways: They either sell off, or earnings continue to go up and the stocks trade sideways. You can have a little of both, but to look at some of these larger tech companies that aren’t growing nearly as fast as their [price-to-earnings] multiples might imply, I think that a lot of them are ahead of themselves.”
If that’s the case, the general market should slide, too. Over 20% of the S&P 500’s total market capitalization lies with its top five stocks, all of which are Big Tech companies: Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Google-parent Alphabet (NASDAQ: GOOG), and Amazon (NASDAQ: AMZN).
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But that’s not to say every sector will struggle if the broader indexes stagnate.
“I don’t think it’s the start of a correction necessarily, but certainly we’ve seen rotational corrections throughout the entirety of this year,” explained Art Hogan, National Securities Corporation chief market strategist.
“This feels much more like a realignment. So, obviously, we get strange machinations in the markets towards the end of a quarter and that’s knocking on the door tomorrow.”
JPMorgan’s top market guru Marko Kolanovic has been calling for a rotation from growth stocks (i.e., tech) to value firms for over two years.
And though there have been a few temporary rotations, growth stocks “won” the pandemic by a wide margin – something Kolanovic argues wouldn’t have happened without Covid.
Kolanovic is probably right. Prior to the pandemic, a value rotation certainly seemed likely. Climbing yields could help put his prediction back on track.
Kolanovic also said back in May of this year that many “investment managers have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way.”
The resulting chaos, he thinks, will lead to a value stock renaissance.
It’s a sound theory that may be proven right in a moderate-to-longer-term timeframe. For now, though, a Big Tech rebound certainly looks more probable.
Especially if yields end up retracing in the coming days.