Why Tech Stocks Are Bouncing Back?
- March 22, 2022
Technology stocks are rebounding this week from their harsh selloff. The stars appear to be aligning for a move higher in these stocks, for now.
The technology-heavy Nasdaq Composite has risen more than 3% last week, as it tries to work its way out of correction territory.
The correction has been driven mostly by rising bond yields, as markets expected the Federal Reserve to lift interest rates to combat high inflation. The Fed will also soon reduce the size of its balance sheet, which means it will drive less money into the bond market. Another factor dragging down bond prices and lifting yields. The 10-year Treasury yield hit a pandemic-era closing high. Higher long-dated bond yields make future profits less valuable and many tech companies are valued based on their expected profits many years down the line.
There are three main factors helping kick-start tech stocks’ recovery. The first is that bond yields are taking a break from surging. The 10-year yield stepped back from its high, trading recently at 1.25%. While this is still an elevated level, investors are likely pleased to see the yield finally go somewhere besides up. It could also be a signal that tech stocks’ valuations are almost finished plummeting. The Nasdaq’s aggregate forward price-to-earnings ratio has already fallen to 28.3 times from 32.7 times Nov. 19.
“Despite the headlines on Meta and other visible tech companies, fourth quarter earnings for the sector are coming in really well.
All of these developments are positive for tech stocks right now, but it remains to be seen whether the recovery will stick in the coming weeks. The 10-year yield could resume its rise and move above 2%, as annual inflation for the longer-term is expected to be above 2% (Investors normally demand a rate of return higher than the inflation rate.) That means earnings multiples for tech stocks might have a little more room to decline from here as well.
At the very least, perhaps the worst is over for tech.