Tech Stocks Rally Falters Amid Rate Hike Concerns

After a strong surge throughout the year, the rally in tech stocks hit a stumbling block in August, primarily due to growing concerns about the Federal Reserve’s prolonged high-interest-rate policy. This unease within the tech sector might not dissipate soon.

The recent robust economic data has led investors to believe that the Federal Reserve will maintain elevated interest rates for an extended period. The minutes from the July meeting of the Fed, released earlier this month, disclosed officials’ worries about inflation remaining high without additional economic and labor market measures.

Over the past month, the likelihood of another rate hike later in the year or early next year has increased. Despite the prevailing consensus that the Fed is finished with rate hikes, hopes for a rate cut have been deferred to as late as May 2024.

On August 21, the yield on the 10-year US Treasury note reached about 4.32%, its highest level since early November 2007. Simultaneously, the 30-year yield closed at approximately 4.46%, marking its highest finish since late April 2011. This surge in yields exerted downward pressure on stocks, as investors tend to favor bonds when their yields are attractive. Moreover, higher yields imply that companies will face greater interest payments on their debts in the future, impacting their cash flows.

The sustained elevation of yields could especially impact tech stocks, which often command a premium due to their potential for rapid growth. A potential decline in the tech sector could have far-reaching repercussions across the broader market since these stocks have played a pivotal role in driving this year’s market rally.

The cooling down of the tech rally has already weighed on overall stock performance. The Nasdaq Composite index is poised to experience its weakest monthly performance this year, interrupting its five-month winning streak. Similarly, the benchmark S&P 500 index is on track to break its series of monthly gains.

Despite these concerns, some tech enthusiasts remain undeterred by the prospect of higher rates. Ivana Delevska, founder and chief investment officer of Spear Invest, anticipates that strong earnings from tech firms will offset potential challenges from elevated yields. Delevska’s company has a significant investment in Nvidia, a leading chipmaker known for its advancements in artificial intelligence.

While the recent days have seen a minor rebound in stocks, including tech, prompted by unexpectedly cooler economic data, the market will be tested by two significant economic indicators later in the week: the Personal Consumption Expenditures price index for July, set to be released on Thursday, and the August jobs report on Friday.

Overall, the market’s reaction to these upcoming data releases, coupled with the ongoing concerns about the Federal Reserve’s interest rate policy, will likely determine the trajectory of tech stocks and the broader market in the coming months.