Nasdaq 100: The downside of rising rates for tech stocks

Traders who have spent the last 18 months blindly buying the dip should at least remain open to the idea that rising interest rates are weighing on equities...

Downtrend 1

If there’s been a major “trade” that’s dominated markets in the post-COVID era, and arguably the entire post-GFC era, it’s been the relentless outperformance of large-cap technology stocks.

While most of these established megacap behemoths, names like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Facebook (FB), churn out profits with high margins, traders have more recently shifted their focus toward speculating on “The Next Big Thing” with stocks like Tesla Motors (TSLA), Netflix (NFLX), Paypal (PYPL) and others that have decidedly lower profit margins.

While “lower profit margins” sounds like a negative attribute (and it certainly can be), stock traders have gladly accepted lower profit margins if it meant investing in fast-growing companies under the assumption that these companies could follow “The Amazon Model” of capturing large market shares and eventually raising prices to earn bigger profits years in the future. This theory was largely supported by the price action in these names for most of the past year as both Congress and the Federal Reserve pumped liquidity into the economy to stave off the COVID pandemic.

Now though, with bond yields surging across the board and signs that stimulus may soon start to ebb, traders are questioning whether these fast-growing but less profitable companies will be able to continue their “growth at all costs” philosophy. Finance 101 tells us that the value of any investment is equal to its future cash flows, discounted back to the present at an appropriate discount rate; with the yield on risk-free government bonds rising, these future cash flows are getting discounted more aggressively, especially for firms with minimal current profits who’s value is driven primarily by the expectations of large profits in the distant future.

Trade now: Log in or open a new account:

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore

This brings us to the Nasdaq 100 (US Tech 100), which is more aggressively weighted toward fast-growing technology stocks than the stodgy Dow Jones Industrial Average or broad S&P 500 indices. Contrary to popular perception, the Nasdaq 100 has roughly matched the performance of the Dow Jones Industrial Average over the last year and actually underperformed the S&P 500.

With rates rising yet again today, the Nasdaq 100 is the weakest of the major US indices, losing more than 2.5% as of writing. Crucially, the index is testing key support from the bottom of its 15-month bullish channel and the 100-day EMA in the 14,700 area:

Source: TradingView, StoneX

Bulls could certainly still make a stand here and keep the Nasdaq 100 uptrend alive (indeed, based on past price action, that may be the most likely scenario), but if the index breaks conclusively below its current support level, it could open the door for a deeper retracement toward previous-resistance-turned-support in the 14,050 area next.

As experienced traders know, it’s crucial to strike a balance between respecting past trends and remaining open-minded to new developments. Time will tell if the Nasdaq 100 is at an inflection point, but traders who have spent the last 18 months blindly buying the dip should at least remain open to the idea that rising interest rates are weighing on equities, especially fast-growing technology stocks.

How to trade with City Index

You can trade easily trade with City Index by using these four easy steps:

  1. Open an account, or log in if you’re already a customer 

    Open an account in the UK
    Open an account in Australia
    Open an account in Singapore

  2. Search for the company you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade

More from Nasdaq

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.