NEW YORK (Reuters) – US technology and growth stocks have taken the reins of the market over the past few weeks, interrupting an interaction in value stocks as investors judge the trajectory of bond yields and upcoming earnings reports. Technology was the best S&P 500 sector in April, rising 8% to 5% from 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 also cost higher.
The gains followed a month-long upheaval in which technology stocks were outpaced by stocks of banks, energy companies and other economically sensitive names that have increased since the breakthroughs of COVID-19 vaccines late last year. The increases in many of these so-called value stocks have slowed recently, while US treasury prices galloped in April after a sharp sell-off in the first quarter. This suggests that some investors may have already praised a rapid growth storm that appears in economic data. “Technology and growth have started to increase a bit as people get a little more cautious,” said Lindsey Bell, chief investment strategist at Ally Invest. “Investors are in this wait-and-see mode … at least until earnings start to rise.”
One of the key drivers for the movement in technology was the treasury market, with the 10-year benchmark rate falling by about 15 basis points in April to about 1.6% on Friday.
Higher yields are particularly challenging for the performance of technology and other stocks with high valuations and high expected future profits, as rising yields lower the values of the stocks in many standard models. The 10-year yield rose by about 83 basis points in the first quarter.
“People are probably taking a deep breath and saying, ‘OK, maybe the rates aren’t going to go directly to (2.50%),'” said Chris Galipeau, senior market strategist at Putnam Investments.
6-month chart of the S&P technology sector and 10-year US Treasury
Shares of technology and other companies with strong “stay-at-home” businesses could also strengthen if there are problems in the nationwide vaccination problem or other problems with the recovery, investors said.
For example, a call by U.S. health agencies to suspend the use of Johnson & Johnson’s coronavirus vaccine this week has led to a move to a number of stay-at-home stocks and out travel names related to the economic reopening. Investors also pointed to the looming influx of quarterly reports as the key to determining market leadership, with Netflix Inc and Intel Corp among the top earnings for technology and growth companies next week.
Many investors believe that the recent market shift is just a break, with value and cyclical equities due to recovery after years of backlog, as investors use equities that are expected to benefit most from what the Federal Reserve expects the strongest economic growth in will be almost 40. years.
“I guess we’ll see more of this internal rotation where growth takes a break and then gets going and then value takes a break and then on,” Galipeau said. “It would not surprise me if it were another few years do not last. ‘
Others have become more cautious about the stock market in general. Strategists from BofA Global Research recently released a report listing five reasons for equities caution, including high valuations and exorbitant returns over the past year. The bank kept its S&P 500 target at 3,800 at year-end, about 9% below current levels. The index rose by 11% this year.
“Amid growing euphoric sentiments, high valuations and peak stimulation, we continue to believe that the market has overpriced the good news,” BofA’s strategists wrote.
Reporting by Lewis Krauskopf; Edited by Richard Chang