NEW YORK (Reuters) – US technology and growth stocks have taken the reins of the market in recent weeks, halting a spin to value stocks as investors assess the trajectory of bond yields and upcoming earnings reports. Technology was the best-performing S&P 500 sector in April, up 8% versus a 5% rise for the benchmark index. Major technology-related growth stocks in other S&P 500 sectors, such as Amazon Inc, Tesla Inc, and Google parent Alphabet Inc, have also been charged higher.
The earnings followed a months-long rotation in which technology stocks were outpaced by stocks of banks, energy companies and other economically sensitive names that have skyrocketed since the COVID-19 vaccine breakthroughs late last year. Gains in many of these so-called value stocks have slowed recently, while US Treasury bond prices galloped back in April after a sharp sell-off in the first quarter. This suggests that some investors may already have priced in a rapid growth spurt showing up in economic data. “Technology and growth are starting to pick up a bit as people are getting a little more cautious,” said Lindsey Bell, lead investment strategist at Ally Invest. “Investors are in this wait-and-see mode … at least until the income gets underway.”
One of the main drivers of the technology movement was the Treasury market, with a benchmark yield on 10-year bonds falling about 15 basis points in April to about 1.6% on Friday.
Higher bond yields are particularly challenging for the performance of technical and other stocks with high valuations and high expected future earnings, as rising yields lower the value of the stocks in many standard models. The 10-year yield increased by about 83 basis points in the first quarter.
“People are probably taking a little deep breath and saying, ‘Okay, maybe rates won’t go straight to (2.50%),'” said Chris Galipeau, senior market strategist at Putnam Investments.
6-month chart of the technical sector S&P and the US Treasury over 10 years
Shares of tech and other companies with strong “stay-at-home” companies could also rise if there are snags in the nationwide vaccination push or other issues with the recovery, investors said.
For example, a call from US health authorities this week to halt use of Johnson & Johnson’s coronavirus vaccine has led to a shift to some stay-at-home stocks and the removal of travel names associated with the economic reopening. Investors also pointed to the upcoming influx of quarterly reports as key to determining market leadership, with Netflix Inc and Intel Corp as the top revenues for technology and growth companies next week.
Many investors think the recent market shift is just a pause, with value and cyclical stocks returning to the lead after years of lag as investors grab stocks that are expected to benefit the most from what the Federal Reserve expects to be the strongest economic growth will be in nearly 40 years. years.
“I suspect we’ll see more of this internal rotation where growth pauses and then it comes and then the value pauses and then it arrives,” said Galipeau. “I wouldn’t be surprised if it stays that way for a few years.”
Others have become more wary of the stock market in general. Strategists at BofA Global Research recently released a report outlining five reasons for caution regarding stocks, including high valuations and outrageous returns from the past year. The bank maintained its year-end S&P 500 target at 3,800, about 9% below current levels. The index is up 11% this year.
“Amid increasingly euphoric sentiment, high valuations and spike stimuli, we continue to believe the market has over-priced the good news,” BofA strategists wrote.
Reporting by Lewis Krauskopf; Editing by Richard Chang