The trend was evident again on Friday following a strong US labour market print which triggered a spike in short-dated US Treasury yields, solidifying market expectations for a 50-basis-point rate hike by the Fed in May.
While the yield on the two-year note, which is influenced by short-term interest rate expectations, surged 12 basis points to 2.45 per cent, the Nasdaq managed to advance 0.3 per cent.
Higher bond yields reduce the current value of companies’ future earnings, making technology stocks particularly vulnerable to a sell-off in bond markets because of their promise to deliver earnings expansion years into the future.
The local market has experienced a similar pattern, with the S&P/ASX All Technology Index rebounding 9 per cent since mid-March, led by shares in Square leaping 33.6 per cent.
Profit-makers
But within the technology sector, strategists have pointed to a noticeable divergence in performance between profitable companies, and those that are not generating a profit.
A Goldman Sachs index of unprofitable US tech stocks fell 2.6 per cent over the month of March, while the Nasdaq 100 Index posted a 4.2 per cent gain.
“In an inflationary and rising interest rate environment, investors are over that visionary growth and are now looking for fundamentally sound stocks which are turning a profit,” said Russel Chesler, head of investments and capital markets at VanEck.
“That sell-off we saw in those profitable tech names was overdone and investors are favouring those companies which can increase their pricing in line with inflation.”
This is illustrated by The New York Stock Exchange FANG+ Index, which tracks 10 of the most highly traded tech companies such as Apple and Microsoft, outperforming the Nasdaq Composite by nearly 9 per cent since the middle of March.
Strategists say the next test for the major tech companies will be US earnings season which kicks off next week.
“Investment funds are likely to start rotating out of risky assets or sell the rally to secure profits before finding further certainty from the upcoming earnings season in two weeks,” said Tina Teng, markets analyst at CMC Markets.
While April is typically a strong month for equities, analysts have warned of a wave of earnings downgrades as markets grapple with the prospect of a series of 50-basis-point rate hikes by the Fed during the second quarter, combined with quantitative tightening.
Analysts forecast growth of about 5.7 per cent in earnings-per-share for the first three months of 2022, according to Bloomberg.
