Why tech stocks are considered interest rate sensitive

Invesco chief global market strategist Kristina Hooper joins Catalysts to discuss her chart for Yahoo Finance's Chartbook highlights how tech stocks have been sensitive to interest rates.

"Tech stocks are viewed as a long-duration asset class because the earnings are farther out in the future, and so they're viewed as being more sensitive to interest rate changes. And so what we have here is not just the Nasdaq 100 (^NDX), but the Fed funds rate, and then something called the proxy funds rate... So what we see here is that clearly, tech stocks are very sensitive to interest rate moves, but particularly so when P/E ratios are higher," Hooper explains.

She notes that the P/E ratio currently in the Nasdaq 100 hovers around 32, which is higher than the historical average and could signal greater sensitivity ahead. However, she adds, "I don't think we're going to see the kind of sensitivity we saw when the P/E ratio was over 100. So I think that's important to keep in mind when we think about what's going to happen and who's going to benefit the most from rate cuts." She believes that the tech industry will benefit from rate cuts, "but not dramatically," and expects greater moves to be seen in small caps

.Click here to check out Volume 3 of the Yahoo Finance Chartbook.

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This post was written by Melanie Riehl

Video transcript

Christine, I want you to follow me over to this chart over here because we had just released Yahoo Finances Chart Book earlier this morning and taking a look at more than 30 charts that economist strategists like yourself have sent over Really, that starting to or reasons to consider these charts?

Because in terms of what it could dictate terms of market moves in terms of the economy here going forward and the shirt that you sent over it kind of has it goes along with what you were just talking about.

How why is this chart important when you talk about the performance or the out performance made that we have seen of the NASDAQ 100 despite the fact and EE even in light of the fact that the Fed has kept rates at such an elevated rate?

So let me start by saying that tech stocks are viewed as a long duration asset class because the earnings are farther out in the future, and so they're viewed as being more sensitive to interest rate changes.

And so what we have here is not just the NASDAQ 100 but the Fed funds rate and then something called the proxy funds rate that was created by the San Francisco Fed to take into account other monetary policy tools and how they create an, uh, essentially a fed funds rate a monetary policy environment that could potentially be tighter or looser than just the Fed funds rate.

Uh, so, uh, what we see here is that clearly tech stocks are very sensitive to interest rate moves, but particularly so when PE ratios are higher.

So I didn't include the PE ratios here, but the PE ratio right here was a little over 200.

So as you can see, that was the start of that huge tech route.

And again it was driven by, uh, interest rates.

Um, it was it was driven by higher sensitivity.

But there were other periods in time where the NASDAQ wasn't very sensitive to interest rate changes, and that's when valuations were lower.

Uh, right now we're in a place where the NASDAQ 100 valuations.

The PE ratio is around 32.

It's higher than the historical average, so I think will be greater sensitivity.

But I don't think we're going to see the kind of sensitivity we saw when the PE ratio was over 100 so I think that's important to keep in mind when we think about what's gonna happen and who's going to benefit the most from rate cuts.

Certainly, I think Tech will benefit, but not dramatically.

I think where we're going to see the biggest moves we've already started to see them is in the cyclicals and the smaller caps because of what they're discounting in the future.

That economic reeler driven by the Fed not making a stake by starting to cut in time to avoid any kind of recession.

So then, given that though, even though they might not have a huge pop to the upside, they're still in a position to outperform.

Even if we do see the Fed lower rates, I think they're in a position to perform.

I think they'll probably lag cyclicals in small caps, at least for some period of time again.

That's if the thesis holds that we are able to avoid any kind of significant downturn and see that economic reeler