Nasdaq 100 Forecast: Will Calming Yields Revive The Tech Sector?

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NASDAQ 100 FUNDAMENTAL FORECAST: BULLISH

  • Tech rebound sent the S&P 500 and Dow Jones to record highs last week
  • Upbeat data, vaccine progress and fresh stimulus may underpin the fundamental outlook
  • The Nasdaq 100 index is trading at a 38.14 price-to-earnings (P/E) ratio, far above its 5-year average

 

The Nasdaq 100 index rebounded strongly towards the end of last week as calming Treasury yields restored market confidence alongside the passing of the US$ 1.9 trillion federal spending bill. Lower-than-expected US core CPI data and smooth Treasury note auctions led longer-term yields to stabilize, alleviating pressure on risk assets, and in particular the technology sector.

The US 10-year treasury yield was little changed from a week ago, after surging more than 70% from a January low of 0.905% to a recent high of 1.622%. Higher longer-term yields make stocks less appealing as compared to government bonds, as the latter appear to be offering better returns considering a risk-adjusted basis. Technology stocks offer relatively lower dividend yields compared to value stocks, rendering them even more susceptible to a selloff when yields climb.

Since mid-February, stimulus-backed reflation hopes led to a catch-up rally in value stocks as investors rotated out from the white-hot tech sector. Value stocks have largely unperformed the growth sector since the beginning of the Covid-19 pandemic (chart below), as lockdowns and social distancing measures reshaped consumers’ behaviour in favour of digital services. The MSCI world growth index surged over 66% over the past 12 months, whereas the MSCI World value index climbed 48%. This trend could carry on if traditional industries - energy, industrial, financial, consumer discretionary and materials – benefit more from an impending economic reopening.

MSCI WORLD GROWTH INDEX VS. VALUE INDEX – 12 MONTHS (NORMALIZED)

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