December 31, 2020
The positive PFE/BNTX data on 11/9 brought higher bond yields and curve steepening. The rise-over-run between the 5-year Treasury yield and 30-year Treasury yield is the key metric for relative sector performance. Spreads wider than ~130bps should benefit Industrials, Financials and Materials. Spreads wider than ~140bps would greatly benefit Financials, while creating problems for secular growth multiples. Tech multiples stopped expanding in early September. Our expectation is these stocks will be given 2-3 quarters to ‘grow into’ their multiples. Beat and raise results from these high-multiple stocks should deliver S&P-like returns, while ‘miss and guide lower’ results should experience a significant re-rating. But higher bond yields (10-year above 1.08% and 30-year yield above 1.76%) and further curve steepening (>140bps) will likely lead to broader multiple compression in secular growth/Tech. Investors haven’t seen this in ~15 years, enough time to forget what it feels like.