As inflation data continue to roll in, investors are continuously updating their financial models. Today’s downward revision in most stocks has led major indices lower. Unsurprisingly, the higher-beta Invesco QQQ Trust (NASDAQ:QQQ), which tracks a broad basket of tech stocks, is leading the decline today.
Currently, the QQQ is down nearly 2%, outpacing the broader S&P 500 and Dow Jones Industrial Average by a significant margin. This move lower is tied to key inflation data released for January, with the Personal Consumption Expenditures (PCE) index reading coming in hotter than expected.
For January, the PCE index showed consumptions expenditures rose 0.6% for the month. On a year-over-year basis, this number came in 4.7% higher. Thus, as a key inflation metric, it appears hopes for continuously cooling inflation are diminishing.
Let’s dive into what this means for tech stocks and why the QQQ is down so materially today.
QQQ Sinks on Robust Inflation Reading
Investors are clearly focusing on interest rates as the macro driver that matters the most right now. For stocks, a higher risk-free rate (yield on government bonds) drives valuations across the board. For tech stocks, with more of their earnings coming in further out years, valuations can be impacted more than stocks earning significant cash flows today. Thus, the hit to stocks in the QQQ can be much harder during times of rising rates.
With expectations for continued rate rises to cool inflation increasing, that’s not good for this group. And while higher consumer spending is generally good for companies in the near term, rising rates generally have the effect of cooling demand over the medium term. Thus, for a company that’s not likely to be profitable for a few years, this can really make the math on its valuation look less appealing.
It’s impossible to know exactly how quickly and aggressively the Federal Reserve will act to cool inflation. But if they do what they say they’re going to do and keep their feet on the economic brakes, tech stocks could see more pressure, at least until rates stop rising.
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.