The Nasdaq-100 Index (NDX) and the related exchange traded funds, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), are scuffling this month, and many market participants are blaming that on rising 10-year Treasury yields.
Those bond yields are moving higher because the prevailing expectation is that, owing to persistent inflation, the Federal Reserve has no choice but to raise interest rates multiple times this year. Due to technology companies’ longer-term cash flows, the sector is often viewed as vulnerable to rising interest rates.
That doesn’t mean that the sky is falling for the technology sector and tech-heavy ETFs such as QQQ and QQQM. Some market observers argue that while other sectors are likely to perform better than tech as rates rise, that doesn’t imply that tech is a lost cause for 2022.
“In our view, higher rates may be more positive for Financials than they are negative for Information Technology stocks,” says David Kastner of Charles Schwab. “However, sector winners and losers likely will depend on the pace at which the Fed raises short-term rates, and the impact those higher rates have on the overall stock market, longer-term interest rates and the yield curve.”
The idea that QQQ and QQQM could ultimately prove more resilient than expected against the backdrop of rising rates is meaningful because the Nasdaq-100 allocates just over half its weight to the technology sector and the bulk of the index’s components are growth stocks, though some of those names’ valuations are retreating this month.
“The problem with oversimplifying valuations in this way is that things don’t remain equal—they change all the time,” adds Kastner. “Higher inflation, which can push interest rates up, also likely increases revenues and potentially earnings—resulting in higher future cash flows—particularly if a resourceful company can increase productivity through automation, for example. Some stocks command higher valuations because the companies have shown that they are cutting-edge innovators, so in investors’ eyes a change in interest rates may not be as relevant as the companies’ future potential.”
As market participants readjust expectations for what the best-performing sectors could be this year, QQQ and QQQM could find support as investors realize that the long-term relationship between tech stocks and 10-year yields isn’t too intimate. As Schwab’s Kastner notes, the primary catalyst for technology stocks is business investment.
“In the case of Information Technology, there is an ongoing strong long-term tailwind. The sector continues to play a pivotal role in advances in robotics and automation; the transformation toward big data and cloud computing; the software and artificial intelligence that make it work; and smartphones, tablets, and network interfaces to enable us to use it,” Kastner concludes.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.