Risky Tech Stocks Sink as Higher Treasury Yields Revive Inflation Fears

(Bloomberg) -- Stocks that were hammered at the end of 2021 are getting trounced again in the new year.

From expensive software makers to newly minted stocks, losses deepened Tuesday as a spike in 10-year Treasury yields renewed investor fears that higher interest rates would weigh on valuations. The ARK Innovation exchange-traded fund (ARKK), the poster-child of the frenzy over hyper-growth names, tumbled 5.4%, while a basket of profitless technology shares plunged almost 6%.

“The shift higher in rates are making all of these stocks less attractive,” said Danny Kirsch, head of options at Cornerstone Macro LLC. “If rates keep going up, I would think this could keep going.”

Days in which a placid market surface masked heavy selling in speculative corners were a fixture of December, a month spent by hedge funds unwinding what had become a big concentration in risky names in software and other industries. Tuesday was a continuation of that trend, at least as far as its effect on the rest of the market was concerned. While the Nasdaq 100 was down 1.7%, losses in the S&P 500 were much smaller and the Dow Jones Industrial Average was having a good day.

Randy Frederick, vice president of trading and derivatives at Charles Schwab, noted that the pain from higher interest rates won't be felt equally among technology companies.

“The smaller-cap, more indebted techs will suffer the most.” he said. “The mega-cap techs with little, or low rate debt will probably be fine.”

Stocks trading at lower multiples to profits or book value outperformed those that are expected to deliver faster sales in future. The Russell 1000 Value Index rose 1% Tuesday compared with a 1.3% slide in its growth counterpart. It's value's second-best day of relative performance since March 2021.

“Not many predictions for a blowout 2022, so many are allocating towards consistently profitable companies, and away from profitless,” said Larry Weiss, head of equity trading at Instinet LLC in New York. “It could be the value comeback we've been waiting for!”