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What comes next for these fallen high flying tech stocks

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Yahoo Finance’s Julie Hyman, Myles Udland and Brian Sozzi discuss the outlook of big tech companies and retail traders moves in the market.

Video Transcript

MYLES UDLAND: Let's take a look at futures as we get set for the day's trading action. We see all three majors pointing to gains at the open. NASDAQ futures have come off their highs of the premarket session, up about 2.3%. Now of course, we see [AUDIO OUT], the interplay here between yields and stocks, bond yields coming off of their recent highs, which means bond prices are going just a bit higher. And that serving as a positive, especially for the tech part of the market that have really been left behind.

But let's talk a little bit more closely about some of these tech high flyers. And Brian Sozzi mentioned them briefly at the top of the program, but some of the real stars of the show-- and these are recent entrants to the market. A number of these companies are 2020 IPOs. But we are talking about names like Zoom, names like Palantir, Snowflake, Unity, you name it. These kinds of high flying names have not just come off of their highs. We're not talking about stocks that are off 10% or 20% right now. We are talking about stocks that have been cut in half in a pretty brief amount of time.

And the both of you know that there are periods in the market where this stuff comes up, and it can come up quickly. 2014, we sort of saw this in software names. We saw a version of this in a number of stocks in 2018, particularly banks when they had the rate hikes there. But Brian, you know, this really raises the awareness, I think, of a lot of investors who are all of a sudden riding what they thought was the future of the economy, which it may well be. But now, a number of their star holdings are down 50%, really just in six weeks. And it can be quite jarring for folks.

BRIAN SOZZI: Yeah, and I think the basic calculation is this. This is what a lot of strategists are doing on Wall Street. I'm sure a lot of, as they would say, home gamers are doing. You go into your spreadsheet, you put in a higher risk-free rate, and that computes a potential lower price target, or lower value of future earnings for a lot of these big tech companies. And that is the basic calculation here.

But I'm going to point to a note this morning out of Goldman Sachs, which I think they wrote to bring some rational thinking back to market. And basically they're saying they're coming up very, very, very, very, very bullish on Microsoft and Salesforce. Goldman Sachs putting both stocks on their conviction buy list. Salesforce, they have a price target looking for about 52% upside. Microsoft, a little under 40%. And I have more of the specifics on a story on Yahoo Finance right now on these calls.

But the bottom line here is they are pointing to continued strong demand for cloud services, and they also view the valuations on both of these stocks as attractive here. Over the past month, Microsoft shares were down about 6.2%. Salesforce down 13%. And so Goldman is saying here, you know what, guys? Listen, we understand the sell off here, we know what's been happening the past month and a half. We understand you're freaked out about a higher 10-year yields and what that might mean to PE multiples for these hot momentum stocks. But you know what? The fundamentals of a lot of these big cap tech companies are strong, especially Microsoft and Salesforce, in this cloud, work-from-home environment.

JULIE HYMAN: Well, it's interesting as we watch this transition that the market appears to be going through. I think one of the things we have to ask ourselves, as we've talked a lot this year about the involvement of retail investors, is what will their behavior look like? In other words, retail investors have seemingly become a lot more active in the market. They've been getting their stimulus checks. Many of them maybe have more time if they're at home, and they're trading. Is their trading horizon going to be more short term or longer term? Because, you know, are they going to be taking profits off the table with some of these high flyers, and then putting that money where? Into the re-opening trades? Or are some of them going to be buying on these dips in the tech stocks, and holding them for the longer term, making the kind of, maybe, longer term bets that Goldman Sachs is recommending with those two companies?

So I think that behavior going forward is going to be interesting to see what those folks are going to be doing. You know, somebody like JJ from TD Ameritrade will be able to give us a little bit of insight into that. And indeed last month, as he pointed out, the retail folks on his platform were buying stocks like Tesla, for example, which has seen a big pullback. So we'll see how that phenomenon plays itself out as the year goes on.

And you know, again, I know I sound like a broken record, but I got to bring up the bond market again, and what's happening there. Because, you know, I think retail investors watch that interplay a little bit less than do institutional investors because they're also watching the effect of bond yields on what happens in the corporate bond market, for example.

We also have a Treasury auction that is happening this afternoon. The last time we had an auction like this, the seven-year auction last week, there was lower demand. And so that's going to be closely watched, and we'll see what kind of effect that has on the bond market as a result.

MYLES UDLAND: So Julie, I think-- you say you're like a broken record, as if the bond market isn't really the tail that wags the dog here. But I do think that teasing out those two audiences, as you outlined, is important here. And I think that you're right in that retail is not really paying attention to what happens in the bond market. Institutions do pay a ton of attention to what happens within the bond market. And I think that that probably portends more durable retail participation than some pros want to believe.

And the way that I see it is all of these macro factors that create these mini cycles which we've discussed happen more quickly within the market now. Right? Whatever your VAR within your portfolio-- and Sozzi talking about head down in an Excel spreadsheet-- whatever all those inputs do to what you have to buy, what you have to sell, that pushes around institutional money to a huge extent.

But if you're a retail trader-- and just hitting the inbox right now is a note from Bank of America on their client flows. Everyone bought equities last week, including retail, almost at a record level, and they all bought tech. And that, to me, suggests that retail is not going to be swayed by a lot of these more complicated flow type, risk modeling type moves that are happening in the market. Which are, really again, the main event. And I do think that it just portends a very interesting future for markets when you think about a retail trader that kind of has a plan, is kind of willing to stick to it, and doesn't just get shaken out by a little bit of a rise in interest rates.

All right. See the opening bell down there on the floor of the New York Stock Exchange on this Tuesday morning. We'll see where the major averages open as we get today's session underway. And we can see, starting to see, the S&P up a little bit. I haven't gotten that opening indication yet on the NASDAQ.

Ferguson ringing the bell. Julie Hyman tells me that's a UK industrial distributor making its US listing, so not a spec. We do like to track how many specs are down there on the floor ringing the bell. We saw one yesterday.