Rising US 10-year bond yields to cause big tech to peak?
Valuations of high-growth companies (like the popular big tech stocks), are highly sensitive to the discount factor to be applied to future earnings - and US 10-year bond yields are the key determinant of this discount factor.The fall in US bond yields since the end of 2018, has supercharged the share price of those high growth tech stocks (see the second chart below). If the huge US fiscal deficit spending plus huge US money-printing (MMT) - or whatever, causes US 10-year bond yields to head higher, this could bring the sharp rally in US tech stocks to an end.
If so, does that cause the entire US share market to peak (since the big US tech stocks have been the dominant driver of the US S&P500 recently) or does this bring about a major rotation of stocks "in fashion"?
A related theme is that "yield hungry investors", whether it be through speculation or desperately chasing yield http://puzzlefinancialadvice.com.au/2020/AFR/201028_AFR_Global_bond_markets_have_turned_topsy_turvy.pdf , are showing signs of the sort of craziness that Jeremy Grantham talks about ( https://www.puzzlefinancialadvice.com/single-post/share-bubble-may-begin-crashing-in-weeks-or-months-jeremy-grantham ). These investors are bidding the yield of higher risk fixed interest securities (including high yielding corporate junk bonds) down to levels where there is only a very small spread between these junk bonds and US Treasury Bonds. This strongly suggests that at some point, there is going to be a major fixed interest crash at some point, with many investors losing huge amounts of capital on their fixed interest investments.
7/01/20 Rising US Bond yields seem like they might have started to bite on the Nasdaq now. Last night in the USA (6/1/20 US time), as the Georgian runoff Senate elections have have seemingly both been won by the Democrats, giving the Democrats control over the Senate (and hence over both houses as well as the presidency), the Nasdaq was down while the S&P500 was up. "Obviously" (from a simple discounted cash flow calculation perspective), rising US bond yields should have a bigger impact on the Nasdaq than on the broader S&P500 - (and value stocks in particular).
This blog was first published on 25/10/20. Updated on 8/1/21