Today, investors may notice that the stock markets are diverging significantly. With tech stocks down and more defensive stocks higher, it appears a full rotation between asset classes is underway.
Investors aren’t necessarily risk-off right now — certain pockets of the market are doing quite well. Industrials, energy, and financials all surged higher today. However, tech stocks have generally underperformed their more defensive peers, as expectations of economic growth sputter and concerns around inflation pick up.
Interestingly, investors in specific sectors are seeing similar price action take hold. Auto makers General Motors (NYSE:GM), Toyota (NYSE:TM) and Ford (NYSE:F) all surged higher today, while electric automaker Tesla (NASDAQ:TSLA) declined precipitously. Investors appear to be taking a much more critical view of valuations right now, seeking out companies with comparative value.
Now, the value vs. growth discussion hasn’t been much of a discussion over the past decade. Declining bond yields, accommodative monetary policy, and a range of economic factors have benefitted tech stocks. That said, it appears investors are betting that a rotation could be underway.
Let’s dive into what’s driving this view today.
Why Are Tech Stocks Down Today?
One of the key drivers of today’s price action among tech stocks is bond yields.
Long bond yields have continued higher, in response to inflation concerns. Additionally, shorter-term bonds yields have declined, suggesting bond investors are pricing in a more bullish view of the longer-term future than the stock market. That said, for growth-oriented tech stocks, higher yields on longer-term bonds aren’t a good thing.
That’s because the 10-year U.S. Treasury yield is typically used as the discount rate for most financial models. As this discount rate rises, the future value of the earnings of specific companies gets reduced. This directly impacts the valuations of companies, particularly those forecasting higher growth over the very long-term.
Thus, for car makers like Ford, GM and Toyota that are producing incredible numbers of vehicles today, these long bond yields don’t matter as much. For Tesla, a company with a tremendous amount of ramping up to do, they matter.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
