Morning Notes — Yield Curve

Tech:  Next week includes earnings for a number of SMID-cap cloud software/growth companies including ZM (Monday pm), BOX/CRM (Tuesday pm), CRWD/OKTA/SNOW/SPLK (Wednesday pm) and DOCU (Thursday pm). Cyclical and value sectors have been in favor since the PFE/BNTX vaccine data hit on Monday 11/9, while the SMID-cap Tech/growth stocks have mostly marked time.  Rapid multiple expansion in Tech stocks during the spring and summer actually came to a halt on 9/3 when CIEN issued bad guidance. Broadly speaking, Q3 earnings trends and guidance from the Tech sector have been impressive.  While there’s been no fundamental reason to sell Tech, investors have been willing to wait for earnings to catch up with multiples. 

Value: A rotation out of Tech and into value sectors will require more than a vaccine.  As you can see in the prior paragraph, expectations of vaccine availability have helped all sectors advance.  Actual rotation requires higher bond yields and a steeper yield curve.  Our forecast is for bond yields to trend higher in H1’21, but the pace of yield back-up should be slow enough to frustrate impatient renters of popular value trades.  Expect the outperformance of value to become more linear when the 30-year Treasury yield breaks through ~1.75% and/or the 5-year/30-year spread widens beyond ~140bps (now ~122bps).  Historically, the best sector to own during periods of curve steepening has been Financials.