Tech Stocks Beckon as Bond Yields Keep Rising

Dow Jones
3 hours ago

Want to really scare all your friends at a Halloween party later this month? Dress up as a chart of the 10-Year Treasury yield.

Rising long-term bond rates have spooked investors and caused more volatility on Wall Street as of late. Investors looking for a sweet treat should consider Big Tech stocks. Yes, the artificial-intelligence trade still looks to be alive and well.

Semiconductors are feeling the love. Nvidia has been enjoying a resurgence lately. And Micron Technology, which reported incredibly strong earnings on Sept. 30, is one of the top stocks in the S&P 500 this year, along with Sandisk, Marvell Technology, Advanced Micro Devices, Intel, and Seagate Technology Holdings.

Even some "old school" tech stocks -- Dell Technologies, Hewlett Packard Enterprise, and Corning -- have gotten a big AI boost. So has Cisco, which is up more than 50% and is the top stock in the Dow Jones Industrial Average this year.

"We're seeing leadership supported by the megacaps. The AI trade is kicking back into gear," said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.

"The trade right now is large-cap tech," Melson said in an interview with Barron's, adding that he's overweight the tech sector. "Earnings are not peaking or plateauing. We still need more supply for chips and memory. There is plenty of runway for growth."

To that end, analysts are forecasting that earnings for the tech sector in the third quarter will be up 65% year-over-year, according to FactSet. And net profit margins are estimated to hit 32.3% for the tech sector, well above the five-year average of 25.9%.

Despite this growth, valuations seem much more reasonable now too. Even though both the S&P 500 and Nasdaq Composite indexes are near all-time highs, the Roundhill Magnificent Seven exchange-traded fund is now trading at 26.5 times earnings for the next 12 months, down from a high of more than 31 times earnings estimates from earlier this year.

The broader tech sector is even more attractive. The State Street Technology Select Sector SPDR ETF trades for 22 times earnings projections for the next four quarters, compared with a peak multiple this year of nearly 26.5.

"Large cap performance has been led by tech for the past few years and we expect that going forward," said Jed Ellerbroek, a portfolio manager at Argent Capital Management who works on the Argent Large Cap ETF, in an interview with Barron's.

"That's because earnings growth has been roughly double that of other sectors. We've had brief interludes where other sectors have been leading but investors inevitably rotate back into tech," Ellerbroek added. Nvidia, Amazon, Alphabet, Microsoft, and Applied Materials are the largest holdings in the fund.

Investors shouldn't ignore some of the leading international tech companies that are benefiting from AI, either. Paulina McPadden, an investment manager with Baillie Gifford, said the firm owns both Taiwan Semiconductor Manufacturing and South Korean memory chip manufacturer SK Hynix.

"We're still finding opportunities in tech," McPadden told Barron's. "Despite their massive outperformance, the stocks are not richly valued."

Taiwan Semi trades for less than 20 times earnings estimates for the next 12 months while SK Hynix is valued at just four times forecasts. McPadden said these low valuations are "partly a reflection of how violently cyclical" the chip business, and memory chips in particular, have been in the past. But she argues that this is less of a concern now given that there are fewer large chip companies, which gives them a stronger negotiation position for pricing.

As Halloween approaches, keep in mind that there are ways to avoid the horrors of the bond market.

 

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