Just as Wall Street is rallying, tech stocks are facing a storm of new rates

(Bloomberg) — Jerome Powell’s latest hawkish message threatens to open a new front in the ever-raging battle between tech stocks and Treasury yields — potentially hurting money managers who have just flocked back into mega-caps on USA.

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The Nasdaq 100 posted its biggest decline since the week ended June 10 after the Federal Reserve chairman touted on Friday his iron determination to raise interest rates in restrictive economic territory to cool inflation to decade highs.

Portfolio managers, including long-term bulls in the sector, see the risk of further losses ahead for interest-rate-sensitive technology stocks – as all signs point to Powell making good on his policy threat, given that commodity prices and services are still stubbornly high around the globe.

Read more: Powell talks tough, says rates likely to stay high for some time

The rapid rise in 10-year bond yields this month has already rattled so-called growth stocks, while sparking a cross-selling in assets following the recent $7 trillion rally in stocks.

Worries on Wall Street are now bracing for the Treasury benchmark to retest the near peak of 3.5% hit in June or climb further to 4% – threatening fresh damage to blue-chip companies after the group rebounded more than 20% from the bear market nadir.

“If yields rise to 3.5%, that will shake the markets and be particularly painful for tech stocks,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments. “If we get to 4%, the whole stock market will change and recalibrate.”

All of this threatens to catch hedge funds off guard after a cohort in industry data tracked by Goldman Sachs Group Inc. increased technology bets last quarter to the highest level since the pandemic began, on the belief that a brewing economic slowdown will revive megacap safety trading.

Another wave of volatility rocked Wall Street on Friday after Powell lashed out at the Jackson Hole Symposium when he warned of tighter policy “for some time,” noting that history “strongly cautions against premature policy easing.” Futures ahead of the Fed’s September policy meeting were seen at 64 basis points of tightening at one point on Friday, compared with 59 basis points before the speech. But the stock market bore the brunt of Powell’s message that rising interest rates could undermine economic growth, as the tech-heavy Nasdaq 100 fell 4.1 percent, although the 10-year yield remained broadly flat.

Generally speaking, technology companies are particularly susceptible to fears of rising interest rates because many are valued based on projected earnings delivered years into the future. The present value of these future profits are worth less as yields rise.

Read more: Stock Bulls’ cockiness eases after Powell issues warning

Rising interest rates also make financial transactions more expensive. This is not a problem for companies like Apple Inc. and Microsoft Corp., which are flush with cash, but it increases risks for younger companies that are burning through cash in pursuit of rapid growth.

The yield on the 10-year U.S. Treasury note was hovering around 3 percent on Friday, up from around 2.57 percent in early August.

“Investors are clinging to a strong pivot, but they won’t get there until inflation comes down — it’s certainly peaked, but it needs to come down significantly,” said Sean Sun, portfolio manager at Thornburg Investment Management. “If the Fed has to raise rates even more aggressively to get there, then we could see the 10-year return to around 3.5%.” This transition is unlikely to be painless for tech stocks.”

Money managers with a long-term focus are notoriously reluctant to offload technology exposures due to the cohort’s reliable earnings generation, healthy balance sheets and ability to weather disinflationary trends.

For investors looking to maintain exposure to technology firms, Sun advises clients to buy shares of IT services companies while avoiding unprofitable, long-term plays such as early-stage software companies.

Tengler at Laffer Tengler sees tech pain in the near term, although he favors the cohort over the next three to five years. It sticks to cybersecurity stocks and companies that invest in cloud services such as Amazon.com Inc., Microsoft and Alphabet Inc., parent of Google, while avoiding struggling social media firms such as Meta Platforms Inc., parent of Facebook .

Meanwhile, electronics prices in the Adobe Digital Price Index, an alternative gauge of consumer price trends, fell 9.3 percent in August from a year earlier, which could help signal lower inflation in the coming months, according to Jim Paulson, chief investment strategist at the Leuthold Group.

This is one of the reasons why he is a bull in the sector.

“The real question for longer-term investors is, is this the 1970s, when we have consistently higher inflation for a longer period of time?” If so, then you don’t want a tech stock,” Paulsen said in an interview. “Or is this just a cyclical spike in inflation? The odds strongly favor that we will eventually return to disinflation.”

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