Wall Street tech companies versus the Federal Reserve

Wall Street tech companies versus the Federal Reserve

Wall Street tech companies, like many other sectors, have not had a good year. The latest statements by the chairman of the Federal Reserve, Jerome Powell, at the Jackson Hole annual meeting have not been flattering for the sector. Since a new increase in interest rates is expected, according to Jessica Menton at Yahoo Finance.

The Nasdaq 100 posted its biggest drop since the week ending June 10 after the Federal Reserve chairman on Friday touted his unwavering determination to raise interest rates into tight economic territory to cool inflation to record highs. decade.

Portfolio managers, including long-term bulls in the sector, see the risk of further losses going forward for rate-sensitive tech stocks as all signs suggest Powell will make good on his political threat as equity prices goods and services remain stubbornly high around the world.

A rapid rise in the 10-year note yield this month has already rattled so-called growth stocks while triggering a cross-asset sell-off after the stock’s recent $7 trillion rally.

Wall Street frets are now bracing for the benchmark Treasury index to retest the near 3.5% spike reached in June or rise further to 4%, threatening further damage to blue-chip companies after that the group rallied over 20% of the bear market.

“If yields go back up to 3.5%, that will rock markets and be particularly painful for tech stocks,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments. “If we get to 4%, the entire stock market will change and recalibrate.”

All of this threatens to catch hedge funds off guard after the industry data cohort tracked by Goldman Sachs raised tech bets last quarter to the highest level since the start of the pandemic, with the conviction that a slowdown budding economy would revive megacap security trading.

Another wave of volatility rocked Wall Street on Friday, after Powell’s jaw dropped at the Jackson Hole symposium when he warned of tightening policy “for some time,” as history “strongly warns against premature policy easing.” ”. Futures contracts referencing the Fed’s September policy meeting traded at 64 basis points of one-point tightening on Friday, compared with 59 basis points before the speech. But the stock market took the brunt of Powell’s message that interest rate hikes can undermine economic growth, as the Nasdaq 100 fell 4.1%, even as the 10-year yield held steady in terms. generals.

Generally speaking, technology companies are particularly susceptible to fears of rising interest rates because many of them are valued based on projected earnings delivered in future years. The present value of those future earnings is worth less as returns increase.

Interest rate hikes also make financing operations more expensive. That’s not a problem for companies like Apple and Microsoft that are flush with cash, but it raises the risks for younger companies that are burning through cash in search of rapid growth.

The 10-year US Treasury yield hovered around 3% on Friday, down from 2.57% in early August.

“Investors are looking for a dovish turn, but they won’t get it until inflation falls; it has certainly peaked, but it should come down significantly,” said Sean Sun, portfolio manager at Thornburg Investment Management. “If it takes the Fed to hike rates even more aggressively to get there, then we could see the 10-year return to around 3.5%. This transition is hardly going to be painless for tech stocks.”

Money managers with a long-term focus are reluctant to shed tech exposures due to the cohort’s reliable earnings generation, healthy balance sheets and the ability to take advantage of disinflationary trends.

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