Tech Stocks That Are Rate-Sensitive Are Gaining In Popularity As Yields Fall

Big tech stocks that have been under pressure in recent weeks are getting much-needed relief from a sharp drop in bond yields.

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Silicon Valley Bank's collapse wreaked havoc on the broader banking sector Monday and drove investors into safe-haven assets. In the same period, the yield on the 10-year Treasury note fell to its lowest level since February, while the yield on the 2-year Treasury note declined to its lowest level since 1987. Tuesday's yields rebounded.

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“Suddenly, investors are seeing Tech as safe,” wrote Chris Murphy, co-head of derivative strategy at Susquehanna.

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As yields soared to multiyear highs in recent months, and the Federal Reserve restricted its monetary policy in an effort to quell inflation, the technology sector has suffered from extreme volatility in recent months. Due to higher interest rates, valuations for tech stocks are less attractive since future profits are less valuable as a result of higher interest rates.

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However, a recent pullback in yields is making some of the beaten-up names more appealing now that yields have fallen. The technology giants Apple and Amazon, both of which have solid balance sheets, cash flows, and earning potential, saw their shares rise by more than 1% during Monday's trading session. The stock price of Microsoft rose by 2.1% on Tuesday. It was a positive day for all three stocks on Tuesday.

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EMJ Capital's Eric Jackson says there are "extremely bullish tailwinds" for the sector going forward when combined with increasing disinflation expectations and backstop assurances for SVB depositors with money in the bank.

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“We will have to see what happens over the next few days, but I believe that there is reason to be optimistic that the economy will continue to grow,” and that it will benefit the sector, he told Trade Algo on Monday.

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Although Dan Niles remains negative on tech generally, he remains bullish on Meta Platforms. Based on the company's strong business and low multiple, he maintains his long position in the stock.

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Despite this, Niles believes the next move in the market will be lower by 5% to 10%, and the Fed will continue to raise interest rates for some time to come. This is why he recommends investors maintain a mix of long and short positions.

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Following the recent selloff in technology stocks, Paul Meeks also views the rise in technology stocks as a short-term relief rally that will end shortly.

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The potential for the interest rate hikes to be moderated may mean good news for the tech industry and for aggressive growth as well, but the macro picture remains skewed to the downside, according to Independent Solutions Wealth Management's portfolio manager.

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"Aside from this bank blow-up, inflation is still scary, it is still high, and it is still likely to be a more powerful impetus for the Federal Reserve to raise interest rates than to lower them," Meeks concluded. “The bottom line is that I think this is a short-term rally, definitely not the beginning of a new bull market. In the next earnings season, you are likely to see a new bull when fundamentals in the sector improve,” which is unlikely to happen until next year.