Nasdaq set for worst month of 2023 as interest rates rise

Rising interest rates have hammered tech-heavy growth stocks in the last few months.

Why it matters: Tech stocks have been the key driver of this year's rally, so if they falter, the market could be set for a hiccup, or worse.

The big picture: Certain kinds of stocks are especially sensitive to changes in long-term interest rates.

• Generally speaking, these stocks tend to be companies poised to capitalize on tech trends that, while they aren't actually profitable at the moment, could potentially generate a bottom-line bonanza at some hazy point in the distant future.
• They soar when long-term rates — essentially the yield on the 10-year Treasury — fall, and tend to get clobbered when long-term rates rise.

Flashback: Earlier this year, as inflation started to ease, long-term rates fell, generating a massive rise in the share prices of giant tech companies like Nvidia and Microsoft that seem well-positioned to benefit from AI.

• The broad tech-heavy Nasdaq Composite surged more than 37% year-to-date through mid-July.
• And the S&P 500 was up almost 20%, largely on the back of massive surges in the so-called Magnificent Seven.

The other side: Other parts of the market tend to perform better with a rising rate backdrop.

• These include energy stocks, financial firms and industrial companies — sometimes known as "cyclicals" because they do better when the short-term outlook for the business cycle is bright.

The bottom line: Even so, the massive size of tech stocks means a downdraft there might have a bigger impact on the market than a rally in cyclicals can offset.

• In other words, the new record high we were starting to see on the horizon a few weeks back might have been a mirage.