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Will tech stocks crash

At the start of this week, the US Nasdaq Composite Index – which includes many technology stocks – entered “correction” mode. On Monday, it plunged more than 10% below its all-time high on February 12. Some individual stocks even found themselves in the “bear market”, plunging more than 20% from their peak. These are names known on Wall Street, like electric car maker Tesla, video service Zoom, or data analytics company Palantir. Closer to us, the Dutch manufacturer of microchip machines ASMI and the Belgian specialist in semiconductors for the automotive sector Melexishave lost more than 20% from their recent peak.

But as we could see the next day, the wind can quickly turn on the stock market. On Tuesday, the Nasdaq quickly recovered 3.7%, signing its best session since early November. The FANG + index, which groups together the technological giants, even gained 6.4%. With a rebound of 19.6%, Tesla had its best day on the stock market since February last year. Since then, the courses have resumed their way to the heights.

This rebound was caused by a reversal in the bond market. Within days, the US long-term rate fell 10 basis points to hit 1.49%. Previously, it was the rise in the same rate that had pushed technology stocks down. The yield on US ten-year Treasury is still at 58 basis points above its level from 1 st January.
Tech stocks are very sensitive to rates, as their valuation largely depends on their future earnings. The more distant these benefits are, the more the rate plays an important role in the valuation model of a share: with a zero rate, 10 euros will be worth the same thing in five years as today. It is different when you can make money risk-free buying sovereign bonds, and a business when it has to shell out more to borrow. For those who are familiar with finance jargon: the base rate is the determining factor of the WACC or Weighted Average Cost of Capital model. The cost of capital – the weighted average cost of equity or debt – plays a crucial role here. Puilaetco calculated that if the rate fell from 1% to 1.5%, profits in 30 years would be worth 26% less today.

Dividend shares


The rate hike isn’t just weighing on tech stocks. The higher the yield on sovereign bonds, the less attractive dividend-paying stocks are. Which explains why utility companies, real estate, healthcare, supermarkets, the food industry, or manufacturers of essential consumer goods have been lagging for several weeks. They generate fixed cash flows and dividends. They display a defensive profile but will grow less rapidly when the economy fully reopens.
On the other hand, cyclical sectors and banks prance at the top of the ranking. They will have more profit leverage as the economy recovers. In addition, banks benefit from a higher spread (difference between short and long-term rates). Since they grant long-term loans with the deposits they remunerate in the short term, their profit margin increases with the difference between the two rates. This year, European banks have already gained 20%.

For Bank of America, however, rates are not the only ones responsible for the correction inflicted on the tech sector… “It’s an important trigger, sure, but one factor among many. Valuations were just over the top, as the near-term peak in the tech earnings cycle is likely behind us. A month ago, the Nasdaq Composite was quoting 40 times its 2020 profits. We have to go back to the dot-com period to regain these levels. And this, while, due to the reopening of the economy, many technology companies, which fully benefited from the pandemic, should show slower growth this year. This situation will contrast with the double-digit growth expected of other sectors that will benefit from the recovery of the economy. “

According to data provider Refinitiv IBES, analysts expect U.S. tech companies’ profits to rise 15% in 2021, lower than in many other industries. Industry, companies active in commodities, and banks should respectively be able to increase their profits by 75, 34, and 23% compared to 2020. And this, while the technology sector – valued at 27 times its expected profits for 2021 – is the most expensive. The historic price-to-earnings ratio for the technology stands at 21.

Speculative bubble


Bank of America also expects some investors to take profits in tech stocks that have risen sharply due to the speculation that characterizes certain segments of the market. The best example is that of the small American technology company Signal Advance. On January 7, Tesla boss Elon Musk tweeted the “Use Signal” message. The tweet referred to a messaging app as an alternative to Messenger and has been forwarded more than 50,000 times. Fans of the multi-billionaire have flocked to the eponymous and unknown small tech company, Signal Advance. In a few days, the share’s value had multiplied by 17,500. Even after Signal Advance said it had nothing to do with Musk or the messaging app, many investors continued to buy the stock. The small company, which is facing financial difficulties, is still trading at three times the price it was before Musk’s tweet.

And we must not forget the kidding jumps caused by the army of Reddit investors. After the fuss around the GameStop gaming chain, they are trying to push the prices of other heavily “shorted” and unknown stocks to absurd valuations. This week, they pushed an action on the ticker EYES (Second Sight Medical Products) from 1.50 to 22 dollars. When the rise started to show signs of weakness, they darted their arrows at EARS (Auris Medical). Pure speculation based on quick wins is a dangerous game, leading some to stay out of the market.

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