Nasdaq Bulls See Glimmer of Hope in Aggressive Fed

06/14/2022

4 minutes read

2022.06.14 15:46

(Bloomberg) — For technology-stock investors, a more aggressive Federal Reserve could be the best possible outcome from this week’s meeting of central bank policy makers.

The Fed could send a signal to markets that it’s determined to get inflation under control, and that might cool down the surge in U.S. Treasury yields, the benchmark for global borrowing costs, which climbed Monday to the highest since 2011.

Soaring inflation has brought an end to the era of essentially free money and laid waste to vast swaths of the speculative investment landscape. Cryptocurrencies, electric-vehicle stocks and tech shares have all plunged, miring the tech-heavy Nasdaq 100 Index in a deepening bear market.

But after Monday’s market plunge, valuations are now relatively low, and bond yields already reflect significant further rate increases by the Fed, so the time to buy is near. At least, that’s what the tech bulls hope.

“The 10-year has already discounted quite a bit of Fed tightening, and we should be well through the adjustment to the bond market, and well through the selloff, given how much stocks have come down,” said Justin Kelly, chief investment officer at Winslow Capital Management, which counts Microsoft Corp (NASDAQ:MSFT)., Amazon.com Inc (NASDAQ:AMZN)., and Alphabet (NASDAQ:GOOGL) Inc. among its biggest holdings.

Fed Chair Jerome Powell indicated last month that the central bank would raise rates by half a percentage point this week as long as economic data came in as expected. Friday’s surprisingly strong consumer price data sent markets tumbling and prompted increased investor bets on a 0.75-point move. The decision is due at 2 p.m. Wednesday in Washington.

Higher rates mean investors place a bigger discount on the present value of future profits, and many highly valued tech stocks offer nothing but future profits, so they’ve gotten hit the hardest. A basket of the priciest software names sank 8% Monday, bringing its year-to-date drop past 50%. However, the pain has been widespread, and the Nasdaq 100 is down 31% in 2022.

Major companies like Apple (NASDAQ:AAPL), Microsoft, and Alphabet are all down more than 25% this year. Amazon is off 38% and both Nvidia (NASDAQ:NVDA) Corp. and Meta Platforms Inc (NASDAQ:META) have shed more than 45%.

Investors are pricing in a slowdown in earnings growth on the view that surging inflation and the resulting higher interest rates will curb consumer and industrial demand, possibly leading to a recession. The yield on the 10-year US Treasury note soared to almost 3.4% Monday from below 1.35% in December.

“We need to see inflation begin to cool off before we can have a sustained rebound,” said David Lebovitz, who helps oversee $2.6 trillion in assets as global market strategist at JPMorgan Asset Management.

Analysts now forecast earnings for growth companies will rise 1.4% in 2022, down from the 5.8% pace that had been expected in April, according to Bloomberg Intelligence. Consensus expectations for so-called value companies, which sell at a relatively low multiple of profit or book value, have risen over the same period.

At the same time, investors remain optimistic about the long-term prospects for tech, even in a weaker macroeconomic backdrop, and the market’s rout has eased concerns about valuations. The Nasdaq 100 is trading at about 18.8 times estimated earnings, below its 10-year average multiple of 20, while industry bellwethers like Alphabet, Amazon, Meta and Salesforce (NYSE:CRM) Inc. are all below their long-term averages.

Indeed, tech stocks look likely to bounce at the open of trading Tuesday: Nasdaq 100 futures rose 0.9% at 6:52 a.m. in New York.

“High-multiple stocks still don’t look like the place to be, but if you have defensive growth businesses where the multiple is in line with the historical trend, that looks like a nice fat pitch from the market,” said Winslow Capital’s Kelly.

Tech Chart of the Day

If Meta Platforms was hoping that its new ticker symbol would help investors forget about the months of weakness in the stock, that plan hasn’t worked out so far. The stock has slumped in each of the three trading days since it started trading as META, and the 17% slump over that stretch represents its biggest three-day drop since February. The stock also closed Monday at the lowest since April 2020.

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