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If you’re looking for a reason why the stock market has bottomed, look no further than Big Tech. And if you’re looking for a reason why it might start sliding again, look no further than…Big Tech.

During the

S&P 500’s
5.2% drop from its Sept. 2 high to its trough on Oct. 4,


Apple

(ticker: AAPL),


Microsoft

(MSFT),


Facebook

(FB),


Amazon.com

(AMZN), and


Alphabet

(GOOGL) fell an average of 8.6%. That made it almost impossible for the S&P 500 to climb, because those stocks account for about a fifth of the benchmark index. They’ve all behaved better since then, gaining 4.1%, on average. That’s helped the S&P do something that it hadn’t done in nearly three weeks—close above its 50-day moving average, a sign that the overall market could be ready to head higher once again.

There was no news—at least no good news—to lift Big Tech in the past 1½ weeks. Apple was on the receiving end of reports that it had cut iPhone production because of part shortages. Microsoft finally decided to cut bait and pull LinkedIn from China. Amazon was accused of copying popular products in India. And Facebook was, well, Facebook. Only Alphabet, which J.P. Morgan recently described as “the most liked” of the big internet stocks, emerged without the whiff of bad PR.

But these days, a big move in bond yields can outweigh rumors, innuendo, and scuttlebutt. The 10-year Treasury’s yield surged from 1.29% on Sept. to 1.611% on Oct. 11, a rise that coincided with Big Tech’s decline. And the stocks’ rally from their lows this past week coincided with the 10-year yield slipping back to 1.519%. It stood at 1.576% early Friday afternoon.

The connection between yields and tech shares is no illusion. The correlation between the S&P 500 Technology Sector index’s performance, relative to that of the S&P 500, on the one hand, and the 10-year yield on the other has averaged -0.69 this year, and hit -0.78 for the 126 days ended Sept. 30. (A correlation of -1 means that two variables move in perfect opposition.)

“As a result of this recent trend, any uptick in yields seems to be a default negative for tech stocks and brings immediate worries of a selloff among investors,” writes Brian Belski, chief investment strategist at BMO Capital Markets.

However, Belski adds, the correlation of tech’s relative performance to the 10-year yield historically has oscillated from negative to positive and back again, with no real pattern. In fact, tech outpaced the S&P 500 during five of the previous periods of rising rates—and is doing so again, gauged from the 10-year yield’s bottom in March 2020. For Belski, that’s a sign that tech investors should be cautious, but should avoid wholesale dumping of the stocks. “[We] see the S&P 500 Information Technology sector as a market performer in the coming months, and believe the key focus should be on stock selection,” he advises.

But rising yields aren’t the only danger for Big Tech, observes Tom Essaye of the Sevens Report. The stocks face regulatory headwinds that finally could be beginning to bite. At the same time, Covid-19 cases continue to fall, suggesting that the group is losing a tailwind for its earnings and share prices.

When Evercore analyst Mark Mahaney added Facebook to his Tactical Underperform list this past Thursday, he noted that online advertising platforms, including Alphabet and


Twitter

(TWTR), could be in for tough times. The reason: The boost that online shopping got from the pandemic is starting to fade, according to Mahaney. “Now we believe the reverse is likely to occur and therefore have a similarly negative impact on their fundamentals,” he writes. Facebook reports quarterly results on Oct. 25; Alphabet, on Oct. 26.

Other Big Techs face similar problems. Internet retailers’ earnings are expected to drop more than 20% year over year, according to


Credit Suisse

data. That could be especially painful for Amazon, which is spending more as it encounters higher costs and expands internationally. That has led Baird analyst Colin Sebastian to cut his fourth-quarter operating income estimate for the e-tailer to $7.6 billion, versus the Street consensus of $8.1 billion.

“We assume that Amazon will remain focused on growth and expansion of global services, which will require ingestion of higher ‘front-line’ labor costs, transportation and logistics expenses (including fuel and equipment inflation), product costs, as well as technology (servers, chips and networking equipment, etc.),” he writes. Amazon reports on Oct. 28.

Apple’s earnings estimate was also cut, by Needham analyst Laura Martin, who argues that while September-quarter profits should be fine, the December quarter could take a hit from lower iPhone sales. Nonetheless, she still rates Apple a Buy. Only Microsoft appears to be headed for a quarter free of obvious problems. Apple’s results are due on Oct. 28; Microsoft’s, on Oct. 26.

Maybe the market’s pullback really is over. But with so much riding on just five stocks, we wouldn’t recommend getting comfortable until Big Tech has had its say.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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