Growth and technology stocks are priced for perfection. And that leaves them vulnerable to any missteps.

Just look at Apple last Friday. After an impressive 51% run higher this year, the company shed $160 billion in market value in a single day.

That one-day loss is more than the entire market capitalization of General Motors and Ford combined.

The sudden implosion followed Apple’s latest earnings report, where a disappointing outlook has analysts expecting just a 1% increase in earnings per share this year.

That’s not going to cut it when Apple’s valuation was 53% higher than the S&P 500. And it’s not just Apple. Just look at the tech sector overall.

Compared to other sectors in the S&P 500, tech trades at the biggest valuation premium to its own historical average. In other words, we could say it’s the most expensive sector in the market.

It’s trading 55% higher compared to its historical average.

And for tech stocks, there’s another threat on the horizon… one that leaves the most overvalued companies vulnerable. And it’s something they have no control over.

Interest Rates Threaten Valuations

I’m talking about rising interest rates.

Interest rates have been a hot topic this year. The Federal Reserve has jacked up short-term interest rates to the highest level in more than 15 years.

It’s a symptom of The Great Distortion, which Inside Wall Street editor Nomi Prins has been warning about.

But longer-term rates like the 10-year Treasury yield are rising as well, and that has major implications for both the stock market and the economy. Here’s why…

Higher interest rates make future corporate profits worth less in today’s dollars. And for many growth and tech stocks, their earnings potential lies far ahead in the future.

So tech stocks that are priced for perfection need to deliver on lofty growth outlooks. While, at the same time, rising interest rates keep eating into their valuations. It’s a double whammy.

Here’s more proof. Of all the sectors in the S&P 500, the tech sector has the second-highest negative correlation to Treasury yields.

That means tech stocks tend to rise when interest rates are falling. And they tend to fall when rates are rising, like they are now.

That makes tech stocks’ share prices susceptible to higher rates.

Tech Stocks Don’t Want This Breakout

If there’s one thing that can quickly deflate tech valuations, it’s a rapid rise in interest rates. And the recent action in the 10-year U.S. Treasury yield isn’t helping.

The 10-year yield has climbed back above 4%, as you can see in the chart below.

Chart

That puts the 10-year right back to levels from last October, when the S&P 500 was still in the bear market’s grip.

A breakout above last year’s peak could be the catalyst that squashes the rally in 2023’s big tech winners as higher interest rates pressure the overvalued tech sector.

What This Means for Your Money

Here’s what that means if you have any money in the markets… or are looking to deploy cash sitting on the sidelines.

You should be careful with new purchases of this year’s big gainers in the growth and tech sector, like in some artificial intelligence (AI) stocks.

You’ve already seen the disappointment in Apple’s share price after a low growth outlook, while I highlighted Nvidia’s sky-high valuation last week.

It’s tempting to chase the highflyers but do your homework before adding a position.

In particular, avoid tech stocks whose share prices have surged on AI-driven hopes but have gone too far too fast. They could be susceptible to overvaluation and rising rates.

Three stocks that I would avoid right now are:

  • Nvidia (NVDA)

  • Super Micro Computer (SMCI)

  • C3.ai (AI)

Also, pay attention to interest rates. No matter how promising a company’s prospects, a breakout in the 10-year Treasury yield could deflate tech valuations across the sector.

Best regards,

Clint Brewer
Analyst, Rogue Economics

P.S. There’s only one sector in the S&P 500 trading at a valuation well below its 20-year historical average. It’s the same sector that 21 billionaires are piling billions into. Guys like Elon Musk, Ray Dalio, and Warren Buffett…

Editor Nomi Prins believes they’re getting ready for a rare market event. It’s set to hit on September 20. And folks who prepare now could have the chance to secure a seven-figure nest egg… While those who don’t could have their portfolios cut in half. Watch her latest video briefing for all the details.