Stock market news: In recent weeks, there has been much talk about rotating from technology to cyclical titles. One of the arguments is the growth of real returns, which should not have much evidence of technological shares. Today, a little about them and a little about companies should no longer be here according to some criteria or opinions.
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The following chart compares the almost two-year development of the technology sector and real five-year revenues (inverted scale). Both curves’ mutual development is at least exciting and shows that actual returns somehow speak to technology companies’ attractiveness (I can not reasonably explain the opposite causality). From a purely technical point of view, they should go hand in hand because technology companies usually have the “center of gravity” of the expected cash flow shifted to the distant future. This cash flow’s present value is thus more sensitive to rate movements than for stocks with a more stable cash flow.
However, we can argue with this relatively widespread technical argument that the activity of risk premiums usually offsets the movement of risk-free rates. The point is that rates are falling when the economic outlook is worse, but this is also when risk premiums are rising (and vice versa). Therefore, if ten-year government bond yields fall from 2% to 1%, but at the same time, the stock market risk premium increases by more than one percentage point, the total required return on shares will increase. And technology returns that are sensitive to this return should suffer rather than benefit such an environment.
However, the graph shows that lower (real) rates are indeed associated with rising technology prices and vice versa. So that risk premium either doesn’t have that effect. Or there’s a broader story behind it all. For example, the fact that technology companies today are often quite resilient, have a strong brand, benefit from long-term structural changes in the economy, and investors turn to them as a haven. So keep an eye on stock market news for upcoming months.
The topic of safe and less safe market segments is already directly addressed in the second chart, as stock market news show, which compares this year’s performance of shares in the entire SPX index and the element of so-called zombie companies. These are defined here as companies whose average operating profit for the last three years has been below interest expenses:
The development of the graph’s curves is intuitive because the decline was significantly more substantial in Z-firms. However, they have almost wholly reached the entire market and have recently been doing better. Discussions about Z-companies, creative destructions, and the like, in my opinion, require more distinction than we sometimes hear. But even so – can this year-end as a one in which companies unable to cover their interest costs with operating profit would do better than the entire market?
For historical context: Factor Research reported in 2018 that, measured since the early 1990s, the SPX index had risen more than eightfold, the Z-firm index about sixfold. With his return during all that time, he was able to surpass the entire index in only one period, and it was the peak of the Internet bubble.