Tech Stocks Fly High: What Wall Street’s Saying

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Tech stocks exploded Monday, lifting the major U.S. indices and creating a risk-on facade to a market that was actually risk-off. Meanwhile, tech stocks are getting riskier ahead of earnings. 

The S&P 500 rose 0.84%, with the tech-heavy Nasdaq, the components of which have a heavy market cap weighting in the S&P 500, up 2.51%. Economically-sensitive stocks fell. The 10-Year Treasury yield fell to 0.62%, a risk-off signal. Yields fall when prices rise. 

The NYSE FANG Index rose 4%. Since June 8, the Index is up 17%, bringing an otherwise battered S&P 500 up 0.3%, as many areas of cyclical value are in correction territory. Investors have been searching for secular growth opportunities that can power through cyclical headwinds, which include climbing virus cases, paused state reopenings and—with interest rates unable to fall much from here—a hesitant Congress debating whether to provide more fiscal stimulus. 

In July, tech stocks have been pressured, as sky-high valuations and very supported 2020 earnings estimates are met with earnings reports right around the corner. Netflix  (NFLX) - Get Report is down 9% from its earnings report, on which management said its explosive subscriber growth is a mere pull-forward of demand, rather than an accelerated growth trend for the future. But Monday, investors were moving into growth tech, a class of stocks they’re willing to pay a premium for in the current environment, as many of these companies are indeed driving long-term growth trends in their respective businesses. 

Microsoft  (MSFT) - Get Report, Amazon  (AMZN) - Get Report, Apple  (AAPL) - Get Report and Google  (GOOGL) - Get Report all report this month. According to Goldman Sachs internet analysts, who do not cover Microsoft, most of these stocks are trading at forward one-year enterprise-to-EBITDA multiples roughly 25% higher than their 3-year averages. That may be supported by solid EBITDA growth expectations, although some now question those expectations. 

Meanwhile, large cap oil, consumer discretionary, banking, industrials and materials all fell between 0.67% and 1.7% Monday. These sectors are heavily reliant on a strong economy. Small caps, as shown by the Russell 2,000 Index, fell 0.25%. 

Here’s what Wall Street’s saying:

Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:

"The second leg of the correction should be lead by growth stocks after their dominance in June. Son far, next-twelve-months EPS estimates for tech have decreased by only 10% as much as S&P 500 EPS estimates. Given the inherent cyclicality of technology spending, this [current estimate levels] makes little sense. As a result, we think there is more earnings risk for the tech sector relative to expectations than the others over the next few quarters.” 

Chris Larkin, Managing Director, Trading and Investment Product, E*Trade: 

"Those looking for a tech rebound, could be keeping a close eye on behemoths like Microsoft reporting earnings this week.” 

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