Why haven't tech stocks collapsed under 5% rates? Simple: earnings.
Since 2020, tech earnings growth has exploded versus the rest of the market — now roughly 380% higher on key measures. Technology currently drives ~76% of the $SPX earnings growth. Strip out tech, and the broader market looks far more expensive than the headline multiple suggests.
Add to that: many large companies refinanced debt in 2020-2021 at rock-bottom rates. Today's 5% environment hasn't hit their interest expense yet. Cash generation remains exceptionally strong, and debt service coverage is comfortable.
The traditional valuation argument — higher discount rates should pressure long-duration assets like tech — assumes static fundamentals. But fundamentals haven't been static. They've been extraordinary.
The real risk isn't today. It's when that cheap debt matures and needs refinancing at 5%+, coinciding with any slowdown in earnings growth. That's when the math changes fast.
For now, tech isn't defying gravity. It's earning its valuation through cash flow. The question is how long that continues.
Since 2020, tech earnings growth has exploded versus the rest of the market — now roughly 380% higher on key measures. Technology currently drives ~76% of the $SPX earnings growth. Strip out tech, and the broader market looks far more expensive than the headline multiple suggests.
Add to that: many large companies refinanced debt in 2020-2021 at rock-bottom rates. Today's 5% environment hasn't hit their interest expense yet. Cash generation remains exceptionally strong, and debt service coverage is comfortable.
The traditional valuation argument — higher discount rates should pressure long-duration assets like tech — assumes static fundamentals. But fundamentals haven't been static. They've been extraordinary.
The real risk isn't today. It's when that cheap debt matures and needs refinancing at 5%+, coinciding with any slowdown in earnings growth. That's when the math changes fast.
For now, tech isn't defying gravity. It's earning its valuation through cash flow. The question is how long that continues.