30 September (Reuters) US stocks are trembling due to rising bond yields, and some investors are concerned that the highly valued shares of large technology and growth businesses could be another weakness.
This year, the broader markets have been driven higher by seven megacap stocks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms. As of Tuesday, these stocks were responsible for more than 80% of the total return for 2023 for the S&P 500.
Many of the stocks are viewed by investors as huge winners as a result of advancements in artificial intelligence. Earlier this year, as regional banking crisis rattled the financial system, megacaps’ robust balance sheets and corporate strategies drew in investors seeking a sanctuary.
However, as a result of their soaring stock prices and inflated valuations, some investors believe that the megacaps may be at risk if the stock market remains under pressure from rising bond yields. According to LSEG Datastream, the average price-to-earnings ratio for the so-called Magnificent Seven stocks is 31.8 based on anticipated 12-month earnings. This is far higher than the S&P 500’s ratio of 18.1.
The S&P 500’s broader index, which is currently down 6.6% from its July highs, might be further deflated by losses in the megacaps given their combined weighting of 27%. The S&P 500 has gained almost 11% so far this year.
According to Matt Maley, chief market strategist at Miller Tabak, “the indexes go down when the big tech stocks start going down.”
Some megacaps have already been hurt by the recent stock selloff, with Apple—the largest business by market value—falling by around 13% since late July. High-flier Nvidia experienced a decline of over 12% in September. Apple is still up 32% for the year, while Nvidia is up almost 200%.
Increased yields on Treasury bonds, which are risk-free and sensitive to rate predictions, put more investment competition for stocks while increasing borrowing costs for businesses and individuals.
Fears that the Federal Reserve would keep rates at their current levels for a longer period of time than anticipated have caused the yield on the US benchmark 10-year Treasury to approach its highest level in around 16 years.
According to Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management Co., “The fact that (the megacaps) are more highly valued simply means that they are going to be more sensitive to changes in real interest rates.”
Investor anxiety is on the rise, according to the options markets. According to options analytics service Trade Alert, the 30-day implied volatility for the Nasdaq-100-tracking Invesco QQQ ETF (QQQ.O), which measures how much traders anticipate the shares to fluctuate in the near future, recently increased to 22, the highest level since mid-April.
Strategists however point out that the increase in expected volatility for tech companies is no more than for the general market. If market falls continue to pick up speed, tech equities will be more susceptible to heightened volatility, according to Chris Murphy.
Certain megacap stocks, such as Alphabet, have held up reasonably well throughout the most recent S&P 500 decline. Their shares have only modestly declined since late July.
Since late July, the Nasdaq 100 (.NDX), a proxy for a larger range of large technology and growth stocks, has declined about in pace with the S&P 500 and is still up about 35% for the year. It has fallen 7% from its peak.
Investors recognise additional risks with megacap stocks.
According to Rick Meckler, partner of Cherry Lane Investments in New Jersey, an antitrust case brought by the US against Amazon this week has given rise to “new lines of worry in the megacap space.”
Additionally, J. Bryant Evans, portfolio manager at Cozad Asset Management, stated that while there is some doubt about the long-term gain in earnings, excitement about the rising adoption of AI applications has supported tech stocks this year.