(Bloomberg) – A recovery on the Nasdaq 100 that has recovered up to half of its $ 1.5 trillion loss since the February high was not enough to deter skeptics. In fact, analysts are warning that the index could still face more scams.
Their concern comes from the bond market, where rising yields have put pressure on richly valued stocks, such as the technology companies that inhabit the Nasdaq indicator. A 50 basis point increase in 10-year Treasury yields could lead to a bearish market for the index, or a decline of up to 20%, according to a study by Ned Davis Research.
And as the economy recovers, investors are embracing sectors like energy, which are likely to benefit. One way to see the impact of this rotation outside of technology is to graph the Nasdaq’s relative altitude relative to the S&P 500, a gap that, after briefly exceeding its 2000 level, has recently narrowed. For DoubleLine Capital LP founder Jeffrey Gundlach, it is a sign that another meltdown may be in store.
While the day’s highs – 4% on Tuesday and 2.4% on Thursday – would take the Nasdaq 100 to its first gain in four weeks, it is not calming nerves. After all, bullish days are not uncommon during a bearish trend. In 2000, when the market started to fall for three years, the index had 27 sessions in which it rose by at least 4%. This compares to six such days in 1999, when prices doubled.
“The early stages of a bear market are typically punctuated by fierce highs, and what matters in the end is how far the highs extend and not how quickly they move in a single session,” said Michael Shaoul, CEO from Marketfield Asset Management LLC. “Evidence continues to grow that the technology sector has finally abandoned its global leadership position.”
The Nasdaq 100 is about to fall behind the S&P 500 for the second month in a row. In a week in which the high-tech indicator dropped to a 10% correction, other indices tracking everything from small businesses to banks, from transportation to industrial, have hit record highs. On Wednesday, a version of the S&P 500 that eliminates the market capitalization bias – treating Apple Inc. in the same way as News Corp. – reached an all-time high, even though the Nasdaq 100 was about 8% below its February record, a divergence not seen for two decades.
This is raising alarms for everyone who survived the dot-com crisis. At that time, when the Nasdaq 100 started to fall in March 2000, the equally-weighted S&P 500 continued to march and did not peak until 14 months later – a sign that money was being diverted from the tech giants that fired on the internet. bubble. Ultimately, the Nasdaq 100 lost half its value.
“People should not take comfort in the fact that almost everything else besides the technology group is doing well,” said Matt Maley, chief market strategist at Miller Tabak + Co. “If the technology group continues underperforming, it will weigh on the rest of the stock market eventually. “
Certainly, however expensive they may seem now, the actions of software and internet do not correspond to the extremes seen 20 years ago. And thanks to innovations such as cloud computing and automation, its gains are expanding, as opposed to contraction or non-existence, as they were in 2000. But the strengthening of the economy, supported by vaccines and government support, along with increased income from bonds can spell trouble for the larger sector market.
Although some strategists have ignored the yield risk, saying that technology stocks have shown an unstable relationship with Treasury bills over time, Joe Kalish, chief global macro strategist at Ned Davis Research, has found that since 2014, Nasdaq 100’s future earnings yield – the reverse of its price-earnings ratio, where the higher, the cheaper the shares – has changed almost in sync with the predicted corporate bond rates.
In your model, if 10-year Treasury yields rise to 2% this year, that in turn could bring Baa-rated long-term bond rates to 4.5%, a scenario in which the Nasdaq 100 would have to drop up to 20% to remain attractive, everything else equal. If yields went up, but the Nasdaq did not move, that would indicate an overvaluation, Kalish said, adding that his model displayed correct warnings in 1987 and 2000.
Based on the price-earnings ratio, the Nasdaq 100 is not cheap compared to other stocks, even after the last downturn. With a multiple of 28, his premium on the S&P 500 was about 7% above its five-year average.
In addition, the growth advantage that has sustained the technology’s superior performance in just one year since 2009 is on the verge of disappearing – at least in the next two years – as companies defeated by the pandemic, such as airlines and automakers, react. Profits for software and Internet companies are expected to grow 22% this year and 12% in 2022. Both fall behind the broad S&P 500, where profits are expected to increase 24% and 15%, respectively, show data compiled by Bloomberg Intelligence.
Of course, with the latest federal aid package approved, money can once again flood the stock, preventing losses from growing like a snowball. Still, with the Nasdaq 100 knocking on its relative peak, it would be a mistake not to consider the risk of falling, according to Jim Paulsen, chief investment strategist at Leuthold Group.
“New age investments are at a significant crossroads,” he said. “After a prolonged period of extensive superior performance by Nasdaq and technology stocks, it is not absurd to foresee an underperformance phase, consolidation or even a complete collapse.”
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