NEW YORK (Reuters) – US technology and growth stocks have taken over the market in recent weeks, stopping a rotation in value stocks as investors assess the performance of bond yields and upcoming reports of benefits.
The technology has been the S&P 500 sector with the best performance in April, increasing by 8% compared to a 5% increase in the benchmark index. Large growth stocks related to technology in other S&P 500 sectors such as Amazon Inc, Tesla Inc and Alphabet Inc., Google’s company, have also charged more.
Earnings have followed a rotation of months in which technology stocks have been outpaced by shares of banks, energy companies and other economically sensitive names that have risen since advances in COVID-19 vaccines late last year.
Rises in many of these so-called stock stocks have slowed recently, while U.S. Treasury prices have galloped back in April after a strong first-quarter sell-off. This suggests that it is possible that some investors already have a price on a rapid growth momentum that appears in economic data.
“Technology and growth have started to pick up a bit because people are getting a little more cautious,” said Lindsey Bell, chief investment strategist at Ally Invest. “Investors are in this mode of waiting … at least until profits begin.”
One of the key drivers of the technology movement has been the Treasury market, with a benchmark ten-year yield that fell about 15 basis points in April to 1.6% on Friday.
Higher bond yields are particularly difficult for the performance of technology stocks and others with high valuations and expected future returns, as rising yields reduce stock values in many standard models. 10-year yields rose about 83 basis points in the first quarter.
“People are probably breathing a little bit and saying,‘ Okay, maybe the rates won’t go straight to (2.50%), ’said Chris Galipeau, senior market strategist at Putnam Investments.
6-month chart of the S&P technology sector and the U.S. Treasury at ten years
Shares of technology and other companies with strong “to stay at home” companies could also be strengthened if there are problems in the nationwide vaccination campaign or other problems with the recovery, investors said.
For example, a call by U.S. health agencies this week to pause the use of Johnson & Johnson’s coronavirus vaccine prompted the move to some stocks at home and away from travel names related to the economic reopening. Investors also noted the impending influx of quarterly reports as key to determining market leadership, with Netflix Inc. and Intel Corp among the top tech and growth business gains expected next week.
Many investors think the recent market change is just a pause, as value and cyclical stocks will have to regain control after years of delay as investors take advantage of stocks that will benefit more than the Federal Reserve expects it to be the strongest economic growth in about 40 years.
“I guess we’ll see more of this internal rotation where growth pauses and then activates and then value pauses and then activates,” Galipeau said. “I won’t be surprised if this continues for a couple of years.”
Others have been more cautious with the equity market in general. BofA Global Research strategists have recently released a report detailing five precautionary reasons for stocks, including high valuations and oversized returns over the past year. The bank maintained its closing S&P 500 target for the year at 3,800, 9% below current levels. The index has risen 11% this year.
“Amid an increasingly euphoric sentiment, high valuations and maximum stimulus, we continue to believe that the market has been overpriced in the good news,” BofA strategists wrote.
Reports by Lewis Krauskopf; Edited by Richard Chang