Morning Notes — Rotation

Markets are definitely more calm following Friday’s reversal in bond yields.  Obviously, a more gradual yield backup is preferred from a broad equity perspective. And a calmer yield environment should keep high multiple stocks from a more painful rerating.  Most asset valuations are based on a Discounted Cash Flow model. In this model, assumed future cash flows are discounted by interest rates in the denominator.  Increases and decreases in the discount rate is a huge lever and 40bps makes a world of difference.  The pandemic-induced multiple expansion phase is over and the best scenario for secular growth stocks is they get time to grow into their multiples. Last week, a cloud-based software security company absolutely crushed consensus expectations, delivering +78% bookings growth and flawless guidance.  The stock gained ~4.7% after the report.  A year ago, that kind of report would have resulted in a ~20% gain.