Stocks sold off Tuesday in a move once again led by big tech stocks. Investors have been reassessing tech valuations, while cyclical sectors experience their own modest headwinds.
The S&P 500 fell 2%, dragged down harshly by the components of the tech-heavy Nasdaq 100, which fell 3.4%. The 10-Year Treasury yield fell to 0.68%, signifying pressed inflation expectations, consistent with the self-off in cyclical stocks, which is independent from the move in tech. Still, since tech stocks have a heavy market cap weighting in the S&P 500, the index was falling particularly hard.
“Last week’s decline was technical in nature but fundamentally triggered,” wrote Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley in a note. Tuesday’s negative action continues the same from the 6% decline on the Nasdaq 100 between Thursday and Friday. On those days, large cap cyclical value stocks far outperformed the broader indices. “The market began to contemplate higher back-end rates as fiscal stimulus passes,” Wilson added. Higher interest rates, which have emerged in the past few weeks as the Federal Reserve’s new policy is highly inflationary in nature, may put pressure on the speed of the economic recovery, but they also reduce the value of corporate profits. The lack of new fiscal stimulus also threatening the speedy economic recovery.
And while economically-sensitive stocks have been down in the past few trading days, it has been large cap growth tech companies — many of which do not have much debt and are not intrinsically sensitive to changes in rates — that have sold off the hardest.
Tuesday, Apple (AAPL) – Get Report fell 5%, even as analysts at Wedbush Securities say sales and manufacturing checks in Asia point to continued strong demand for the iPhone 12 to be launched later this year. Tesla (TSLA) – Get Report fell 16%, as not only did big tech sell off, but electric vehicle competitor Nikola (NKLA) – Get Report completed a deal with General Motors (GM) – Get Report, which will give Nikola access to its EV technology in exchange for a small equity stake. This is a “game changer” for Nikola, according to a note from Wedbush Securities’ analyst Dan Ives.
More broadly, valuations for tech companies, after having coming down late last week, are still somewhat stretched, one reason many on Wall Street said caused the tech sell-off. Many are concerned that the accelerated growth trends as a result of the at-home environment in enterprise, streaming, e-commerce and other areas is pulling forward large amounts of future demand, which could easily render valuations far too optimistic.
But Tuesday, airline, banking and oil stocks — all highly economically sensitive — fell more than 1%, a move potentially related to the fiscal stimulus concerns. Interest rats are near rock bottom levels and corporations have already borrowed trillions of dollars to lock in low interest rates. And much of the speedy economic recovery has hinged on fiscal stimulus checks to households and forgivable loans to small businesses.