A 2% 10-year yield could knock 20% off tech stocks, Ned Davis Research calculates

Published Fri, Mar 12 20218:09 AM EST

Surging bond yields sent technology shares sliding into correction territory at one point, and there could be an even more severe sell-off ahead if rates keep going higher, according to Ned Davis Research. The 10-year Treasury yield was on the move higher again on Friday, back up to near its high for the year of 1.62% that triggered the correction. The rebound in rates was hitting tech shares once again in early trading Friday. The Wall Street firm estimated that the Nasdaq 100, the tech heavy index which tracks the 100 largest non-financial companies in the Nasdaq Composite, would drop 20% if the 10-year Treasury yield hits 2% — about 0.4% from now. Ned Davis' calculations were based on the Nasdaq 100's forward earnings yields and forecasted BAA- rated corporate bond yields, which have tracked each other almost perfectly since 2014, the firm said. "If 10-year Treasury yields climb to 2.00% later this year and the recent relationship between stocks and bonds hold, the NDX could see prices decline as much as 20%," Joseph Kalish, chief global macro strategist at Ned Davis, said in a note. The firm does expect the 10-year Treasury yield to hit the threshold later in the year amid an economic reopening and more fiscal stimulus, and that in turn could drive the BAA corporate bond yield to 4.5%. To make the two yields equivalent, the Nasdaq 100 would have to drop 20%, assuming no change in earnings forecasts, the strategist said. A 20% decline would be bear market territory. On Monday, the Nasdaq 100 dropped about 11% below its record high from Feb. 16, falling into correction territory on a closing basis. The sharp sell-off occurred when the benchmark Treasury rate soared above 1.6% in a rapid fashion that some described as a "flash" spike. The drastic moves in the bond market scared investors out of high-growth stocks, which are particularly vulnerable as higher rates reduce the value of future cash flows. Now the tech index is about 6% off that high as growth stocks staged a rebound earlier this week. However, bond yields jumped higher again on Friday and Nasdaq 100 futures were down 1.4%. Investors were rotating out of their pandemic winners in the face of higher rates, while the better prospects for the economy prompted them to snap up cyclicals and value stocks. Some of the stay-at-home stocks are already in bear market territory. Zoom Video and Peloton are now both more than 30% below their 52-week highs . Tesla, one of the biggest winners of 2020, is 22% off its record high.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 31, 2018.

Brendan McDermid | Reuters

The 10-year Treasury yield was on the move higher again on Friday, back up to near its high for the year of 1.62% that triggered the correction. The rebound in rates was hitting tech shares once again in early trading Friday.