May 9, 2022
Prices are very oversold, positioning is light and equity sentiment sits at bearish extremes. Valuations are now at reasonable levels with the S&P 500 trading at 16.19x 2023 earnings estimates. Tech continues to be hardest hit as real yields climb as inflation breakeven yields fall. Inflation breakeven yields decoupled from historical cross market relationships following the 2/24 Russian invasion. A form of inflation panic ensued with retail investors crowding into a shallow TIPS market, driving inflation breakeven yields to unsustainable extremes. Breakeven yields started to top out two weeks ago and began rolling over mid-last week. The result has led to higher real yields (nominal yields – inflation breakeven yields) and lower multiples for Tech stocks. Ten-year real yields are presently +0.27, and 10-year inflation breakeven yields are now 280bps. Breakeven yields have more room to decline, especially if Wednesday’s core CPI print falls short of consensus. The pressure on Tech multiples comes from rising real yields, but a data driven decline in breakeven yields will also weigh on nominal yields at some point. We estimate that point to come when 10-year inflation breakeven yields fall sustainably below 275bps. A break below 275bps would likely result in new support at the ~258bps level. Tech multiples will recover when real yields stop rising, but we use down markets to identify the strongest stocks. In this market, the strongest stocks continue to come from cyclical/value sectors like Energy, Materials and Industrials.