{"id":9920,"date":"2021-10-21T18:08:31","date_gmt":"2021-10-21T18:08:31","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9920"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"are-rising-interest-rates-bad-for-tech-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/are-rising-interest-rates-bad-for-tech-stocks\/","title":{"rendered":"Are Rising Interest Rates Bad for Tech Stocks?"},"content":{"rendered":"\n

Darrin A. from Red Lodge, MT asks; <\/em>Good Morning Mitch, I\u2019d like to hear your thoughts on rising interest rates and technology stocks. All signs point to interest rates rising and tech stocks falling in the future, as far as I can see. Do you share this view? If not, what are your thoughts? Thank you.<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thank you for emailing your question, Darrin. It\u2019s a great\nquestion, and one that I think has a few different answers. <\/p>\n\n\n\n

Let\u2019s start with the basic premise of rising rates, for\nwhich we\u2019ll use the 10-year U.S. Treasury bond as a proxy. The pandemic response\npushed the 10-year to a record low (chart below), and rates have started to\nmove higher of late, albeit at a relatively slow pace. By historical standards,\nlong-duration Treasury bond yields are still very low. <\/p>\n\n\n\n

The Federal Reserve has increasingly indicated their intent\nto gradually reduce QE purchases, which I think is fair to say will put a\nlittle upward pressure on long-duration bond yields. Inflation has run longer\nand hotter than many Fed officials expected, though in their view \u2013 and in mine,\nI should add \u2013 these inflationary pressures are likely to abate in the near\nfuture. Even still, reducing QE purchases, while the economy is simultaneously\nexpanding, could see the 10- and 30-year US Treasury bond yields move higher \u2013\nbut not in the sustained and rapid manner as many people fear. <\/p>\n\n\n\n

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Your question is whether higher yields are bad for tech\nstocks. Conditions today are different than they were 10 or 20 years ago, but the\nfirst thing I\u2019d like to point out is that historically, rising rates have not\nnecessarily been bad for tech stocks. In the two periods I highlight below with\ngreen arrows, yields were rising while technology stocks were performing very\nwell. In the 2016 to 2018 period, technology stocks significantly outperformed\nthe broad S&P 500 index, while the 10-year U.S. Treasury yield was also\nmoving up. <\/p>\n\n\n\n

10-Year U.S. Treasury\nBond Yield<\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n

Now, a counter-argument to my point would be that today,\nmany tech valuations are far more stretched than they were five or ten years\nago. Fair point. When yields are low, investors are more willing to buy growth\nstocks and pay premiums for doing so, meaning that many tech stocks were bid up\nto relatively high multiples. Since rising rates generally benefit\nvalue-oriented companies, a higher rate environment could result in a rotation\naway from growth toward value, which could mean selling pressure in those high\nvaluation tech names. <\/p>\n\n\n\n

I believe that is the premise of your question, Darrin, and\nI think you have a good point. I would counter, however, by saying that a\nportfolio response should not be to sell out of tech \u2013 a better response would\nbe to apply critical fundamental analysis to your portfolio holdings, and think\nabout what valuations are fair relative to expected future earnings and which\nvaluations are maybe too steep. <\/p>\n\n\n\n

In other words, it\u2019s a good time to be very careful in-stock selection within the technology sector, but not bearish on the sector overall, in my view. Many technology companies are not facing the same price pressures and supply chain issues as other companies in the economy, and they still post accelerating earnings and rising gross margins. Slightly higher rates should not materially alter the profit outlook for these companies, which is the main reason investors should consider owning them in the first place. <\/p>\n\n\n\n

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Rising bond yields are seen by some as a red flag for tech stocks, but there is more to the story.<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-9920","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9920","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9920"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9920\/revisions"}],"predecessor-version":[{"id":10284,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9920\/revisions\/10284"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9920"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9920"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9920"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}