🧯3 Reasons why Higher Bond Yields are Negative for Tech Stocks

Technology stocks have been on a volatile ride. As a result, we have received numerous questions on the impact of higher bond yield on high growth stocks. Hence, in this episode, we will review three core reasons.

⚙️#1: A rotation to Value Play

A higher yields environment often means that tech stocks tend to lag value stocks. The higher yield on long-dated bonds means investors expected higher inflation due to strong economic demand. As we know, value stocks are large mature companies that are dependent on firm economic demands for their earnings growth.

We have seen that manufacturers and financial companies tend to be economic sensitive value stocks. So when investors load up stocks in these sectors, they tend to sell their tech holdings and rotate to these value companies.

⌛️#2: Growth Stocks Had a Good Run, till the gas is off

We have seen growth stocks outpacing value stocks for some months, making growth shares relatively more expensive. The Vanguard S&P 500 Growth ETF (VOOG) had climbed by about 6.1% since 2H2021, much higher than its value counterpart (VOOV) of 1.1% gain.

Therefore, we seek value stocks to catch up as some investors have been expecting, consistent with Pika World’s mid-cycle transition phase narrative.

🔮#3: A substantial discount on future profits

Higher yields imply a larger discount on future profits for a company. For many of the growth stocks, they tend to be losing money in the short term. The nature of such companies is that they tend to invest heavily to create future profit.

The future earning streams of such growth stocks is often seen less valuable as when compared with the yield on a safe asset such as a Treasury bond. While it is also notable that higher yields can negatively impact value stocks, they tend to hurt growth stocks valuation more.

As such, Pika World is monitoring the play out as we have hedge our portfolio to ride on this cycle.