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Bond yields have started to drop, and there’s a good chance that they’ll keep falling. And when that happens, growth stocks flourish.
The
10-year Treasury yield
is hovering below 4.6% from a 16-year high of over 5% last month, pushed lower by the expectation that the Federal Reserve is finished raising short-term interest rates. Buyers rushed in, sending the bond’s price higher and its yield lower.
And there’s good reason to believe the yield will inch down even more. The bond is still more than 2 percentage points above the expected average annual inflation rate for the next 10 years, which could lure more investors who want a mix of both stocks and bonds as a hedge against the always-risky stock market.
Stocks that usually get a lift from falling yields are fast-growing tech names. Many count on a bulk of their profits coming many years down the line—and lower long-dated bond yields make future profits more valuable. In turn, the yields lift valuations, which are often shown as the stocks’ multiples of expected per-share earnings over the next year.
That’s why the price of tech stocks has a negative correlation to bond yields.
The impact of bond yields on stock prices is important to understand because it explains why tech stocks struggled when yields shot higher—and why they tend to rise when yields sink. It’s a strategy principle called negative correlation.
Amazon.com (ticker: AMZN), for instance, has had a negative 74.8% correlation to the 10-year yield in the past four years, according to 22V Research. It makes sense since
Amazon
is relatively a high-growth stock, with analysts expecting EPS to increase about 30% annually for the next five years, according to FactSet. For the
S&P 500,
the annual growth expectation is about 8%.
ServiceNow
(NOW) is another example. It has a negative 79.5% correlation to the 10-year yield. Analysts expect better than 20% annual EPS growth for the next three years. There are no published estimates on FactSet beyond 2026.
Other tech stalwarts that fit the description include
Nvidia
(NVDA),
Microsoft
(MSFT), and
Advanced Micro Devices
(AMD). These three have faster expected profit growth than the S&P 500 and correlations of at least negative 60%
Other growth names outside of tech fit the description, too. They include
Tesla
(TSLA),
Nike
(NKE),
Intuitive Surgical
(ISRG), and
Align Technology
(ALGN).
The talk on Wall Street for at least the past few months has been all about bonds and the fallout for stocks. This is food for thought.
Write to Jacob Sonenshine at [email protected]
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