Will Inflation Expectations Keep Pressuring Tech Stocks?


Kim Ming Lam


May 21, 2021



Min Read

We have been seeing choppy trading in the stock market throughout May, as market sentiment has been weighed on by rising inflation expectations.

Official data showed that U.S. consumer prices grew 4.2% on year in April (vs +3.6% expected), the largest increase in 13 years. And producer prices jumped 6.2% on year (vs +5.8% expected), the fastest growth on record.

U.S. Consumer Prices Growth (+4.2% YoY)

Source: Bloomberg

U.S. Producer Prices Growth (+6.2% YoY)

Source: Bloomberg

In fact, solid economic data are indicating on-track economic recovery as the pandemic eases and vaccinations pick up. The Markit U.S. Manufacturing PMI (preliminary reading) rose to 61.5 in May (vs 60.2 expected) -- a PMI reading above 50 indicates expansion. The Markit U.S. Services PMI also climbed to 70.1 (64.3 expected).

Also, the U.S. Labor Department reported that the latest initial jobless claims number has declined to 444,000, the lowest level since the pandemic.

Markit U.S. Manufacturing Purchasing Managers Index (61.5)

(Levels over 50 indicate Expansion)
Source: Bloomberg

Markit U.S. Services Purchasing Managers Index (70.1)

(Levels over 50 indicate Expansion)
Source: Bloomberg

U.S. Initial Jobless Claims (444,000)

Source: Bloomberg

However, upbeat economic data have adverse effects of fueling investors' concerns over inflation. Investors usually view higher inflation as a negative factor for stocks because inflation (normally) increases borrowing and input costs leading to lower earnings...and lower stock prices.

As expected, the U.S. Federal Reserve decided in its latest monetary-policy (April) to keep its key interest rates unchanged at levels close to zero (0.00% - 0.25%). It also maintained it asset-purchase program unchanged.

U.S. Federal Funds Target Rate Upper Bound (Still at 0.25%)

Source: Bloomberg

However, the minutes of this policy-making meeting have added to investors' concerns. The meeting minutes pointed out: "A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

Since June 2020, the Federal Reserve has been purchasing $120 billion worth of assets on a monthly basis to pressure loan costs nationwide. Those assets include U.S. Treasury Bonds and mortgage-backed securities. A tapering of such asset purchases could lead to higher borrowing costs for companies.  

Growth stocks, particularly technology stocks, are usually priced with higher valuations (higher earnings growth expectations) and therefore impacted greatly amid higher inflation, as investors would take profits and jump ship to other stocks less aggressively valued.

For example, Tesla (TSLA) share price slumped nearly 30% from its recent high in the latest correction induced by inflation-fear. Netflix (NFLX) lost over 15%, Amazon.com (AMZN) corrected 12%, and both Facebook (FB) and Apple (AAPL) trimmed over 10%.

High dividend stocks, like utilities and REITs, usually suffer as well because investors have higher yielding government bonds as a less risky alternative,

In our view, the Federal Reserve will not "taper" asset purchases or even raise interest rates in the near future, considering the fact that the economic recovery from the pandemic is only gathering momentum.

And there should be mounting political pressure from all directions holding the central bank from reversing easy monetary policies.

However, it is highly likely that the Fed will keep "talking" about asset-purchase tapering and interest-rate hikes. And this could make stock investors think twice before increasing their bets. And some investors might wait for the current volatility to ease before entering the market.

On this backdrop, although we are taking a relatively cautious stance against tech stocks, we are still holding a bullish view on the stock market in general.

Nasdaq 100 Index : Watch Key Resistance at 14,000

Source: TradingView

The tech-heavy Nasdaq 100 Index held firm at levels around the 14,000 level from mid-April to end-April, marking an intraday high of 14,073.

Market sentiment was thereafter plagued by rising inflation expectations (see above). The Nasdaq 100 Index then underwent a correction of over 8%, breaching the key level of 13,000 and turning the short-term outlook bearish.

Although the index has just climbed back to levels above the 20-day and 50-day moving averages, we need to see a clear break above the psychologically-significant level of 14,000 level to confirm a bullish reversal.

In case it returns to 13,000 on the downside, it should sink further toward 12,600.

Marvell Technology (MRVL) : First Rebound Target at $51.50

Source: TradingView

Marvell Technology (MRVL), semiconductors producer, announced the completion of its acquisition of Inphi Corp.

President & CEO Matt Murphy said: "I am excited to welcome the Inphi team to Marvell and look forward to realizing the tremendous value creation potential of this combination for our customers, employees and shareholders. Together we will have the portfolio, capabilities, and scale to expand Marvell’s leadership in its key growth end markets of 5G, Cloud and Automotive."

In addition, Marvell Technology is expected to release its quarterly result on June 7. The market projected its adjust EPS to rise 50.6% over a year to $0.271, while revenue is expected to increase 16.0% to $804M.

On a daily chart, the stock rebounded from $40.65 and broke above a declining channel. The RSI also broke above the declining trend line.

Having returned to levels above both 20-day and 50-day moving averages, the stock is expected to rally toward $51.50 (the high of April) and $55.85 (the high of January).

The key support level (stop-loss) is located at $40.65.

3D Systems (DDD) : Upside Breakout, Towards $37.00

Source: TradingView

3D printing company 3D Systems (DDD) has rallied more than 50% since announcing first-quarter results on May 10.

The company reported first-quarter adjusted EPS of $0.17, well ahead of expectations of $0.02, compared with a LPS of $0.04 in the prior-year quarter. Revenue grew 7.7% year-on-year to $146 million, better than $137 million expected. In addition, gross profit margin improved to 44.0% from 42.1%.

CEO Jeffrey Graves said the company targets sustainable double-digit revenue growth and 50% gross profit margin.

By contrast, Stratasys (SSYS), another leader in the U.S. 3D printing industry, only posted an adjusted LPS of $0.06 in the first quarter, and adjusted gross profit margin fell to 41.4%. Brokers generally pointed out that 3D Systems’ performance is stronger than expected and outperformed its peers, while the company's outlook also builds investors’ confidence.

On the daily chart, 3D Systems is gathering more upside momentum. It has broken above a falling wedge pattern and has returned to levels above the 20-day and 50-day moving averages.

Bullish investors may consider taking $21.60 as the key support level, with upside targets at $32.40 and $37.00.

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Kim Ming Lam

Head of APAC Research