October Warning: Why Surging Treasury Yields Could Sink the Nasdaq-100 Further

Highlights

• Nasdaq-100 drops 5.8% in September due to high Treasury yields.
• Tech giants overly sensitive to interest rate shifts.
• October outlook bearish on tech stocks.

Opinion: Why the Nasdaq-100 Got Whacked in September and What Lies Ahead

The Nasdaq-100 took a 5.8% nosedive in September, and traders are pointing fingers. The main culprit, as I see it? Soaring U.S. Treasury yields. Let’s dive into how high yields have hit tech stocks where it hurts, and why this trend could spill over into October.

The Magnificent Seven and Treasury Yields

So, who’s been pulling the stock market’s strings? Look no further than the Magnificent Seven: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms. These tech giants account for more than 80% of the S&P 500’s total return this year, according to Reuters data. But here’s the rub: they’re super sensitive to Treasury yields. Why? These yields are the go-to, risk-free game in town. When they go up, they offer an alternative to riskier stocks and also crank up borrowing costs.

Valuations and Earnings

These megacaps aren’t just big; they’re inflated. Their average P/E ratio stands at a whopping 31.8, dwarfing the S&P 500’s 18.1, based on LSEG Datastream’s figures. High valuations mean these stocks are more exposed to shifts in interest rates. As Treasury yields climb, the discounted future earnings of these tech companies take a significant hit, making them less appealing to investors.

Volatility and Complacency

The market’s getting twitchy, and it’s not just a one-off. The 30-day implied volatility for the Nasdaq-100-tracking Invesco QQQ ETF has hit its highest level since mid-April, per Trade Alert. While some argue that tech volatility is in line with the broader market, this could be a dangerous complacency. If the market slides further, these tech stocks might face even sharper declines.

Other Risks and Short-term Forecast

Beyond yields, other headwinds like a fresh antitrust lawsuit against Amazon add another layer of risk. Plus, the much-hyped role of AI in boosting profits hasn’t fully panned out yet. So, what’s the play for October? Given the high valuations, vulnerability to rising yields, and looming risks, I’m bearish on the outlook for tech stocks.

To sum it up, the Nasdaq-100 has been caught in the crossfire of surging U.S. Treasury yields, and this trend could very well extend into October. With these stocks carrying so much weight in the broader market, a continued rise in yields could make the coming month a rough ride for traders.