Interest rates have recently risen, and so have Big Tech stocks. Those two things don’t usually go hand in hand, but these companies’ smart debt management is part of the reason.
But that hasn’t quite been the case recently. The Nasdaq 100—heavily comprised of tech companies such as Apple , Alphabet , Nvidia , Microsoft , and others—is up about 43% this year. A portion of that gain has come from a rising multiple of expected earnings per share for the next year. The index trades at about 24.5 times forward per-share earnings, up from just under 23 times at the start of the year, according to FactSet.
One of the key reasons is that Big Tech companies have reduced their borrowing costs both by managing their debts well and by growing their profits. Those steps have provided a major boost to their equity valuations because they allow these firms to borrow money at lower interest rates. Indeed, those companies have lowered their overall rates in the process. The average yield for S&P 500 growth companies today is about 3%, down from near 3.5% in early 2020 just before the borrowing binge. One way to understand the positive consequences for the equity valuations: These companies are perceived to have an easier time paying back their debt—they’re more credit-worthy—which indicates that more cash has the potential to flow to the bottom line for equity holders.
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