High-tech stocks are in correction territory. Why?

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Stocks Dow NASDAQ

Many stocks in the Tech sector have entered a correction. They are registering declines of at least 10% from their recent peaks. 

The high-tech Nasdaq Composite index ended Friday more than 8% below the all-time high on February 12. Futures point to another problematic trading session on Monday.

Investors are concerned that the reopening of many large economies will lead to a surge in prices later this year. That could put pressure on central banks like the Fed to raise interest rates earlier than expected. 

Soaring rates have been beneficial for fast-growing tech companies. They have helped keep government bond yields meager, increasing interest in riskier investments, such as stocks. 

But now, bond yields are rising due to inflation concerns. That could make assets like US Treasuries start to look more attractive. It could prompt exits from tech names that have been so popular in the last 11 months.

Strategists believe the declines are healthy

Jeroen Blokland, Robeco’s portfolio manager, believes that economic growth estimates continue to improve. Value stocks in banking sectors, which benefit from a healthy economy, may start to take a second look.

The KBW Bank Index, which tracks the top US lenders, is up more than 20% this year. Meanwhile, the Nasdaq has almost erased all of its 2021 earnings.

Many strategists believe that the declines are healthy and that many technology companies’ stock prices have skyrocketed too much, too fast.

Continued selling may depend on what we hear from central bankers in the coming days. The European Central Bank has clearly stated that it will take action if it believes that the rapid rise in bond yields will lead to tighter financial conditions. Fed Chairman Jerome Powell has been less explicit.

Blokland believes that if the 10-year US Treasury yield rises significantly this week, Powell may have no choice but to firmly assert that the Fed will act as necessary to ensure that the economic recovery does not stall affected by market turmoil.

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