Bond yields have seen a recent decline, and there is a strong possibility that this trend will continue. When bond yields fall, growth stocks tend to thrive.

Currently, the 10-year Treasury yield sits below 4.6%, down from its peak of over 5% last month. This decrease is a result of the belief that the Federal Reserve has finished raising short-term interest rates. This has prompted buyers to enter the market, driving up bond prices and causing yields to decrease.

Furthermore, there is good reason to expect that yields will continue to decline. The current bond yield is still more than 2 percentage points higher than the expected average annual inflation rate for the next decade. This makes bonds an attractive option for investors who seek a balance between stocks and bonds as a safeguard against the inherently risky stock market.

One sector that typically benefits from falling yields is the fast-growing tech industry. Many tech companies anticipate a significant portion of their profits to be realized in the future. As long-dated bond yields decrease, the future profits of these tech companies become more valuable. This, in turn, enhances their valuations, which are often represented as multiples of expected per-share earnings over the next year.

Consequently, there exists a negative correlation between bond yields and the price of tech stocks. This negative correlation is crucial to understand as it explains why tech stocks struggled in the face of rising yields, and why they tend to thrive when yields decline. This principle is known as negative correlation.

In conclusion, as bond yields continue to decrease, growth stocks, particularly in the tech industry, are likely to experience a boost. This presents an opportunity for investors to consider these sectors for potential gains in the market.

Amazon (ticker: AMZN)

According to 22V Research, Amazon.com has shown a negative 74.8% correlation to the 10-year yield over the past four years. This makes sense considering that Amazon is a high-growth stock. Analysts from FactSet expect the company's earnings per share (EPS) to increase by approximately 30% annually for the next five years, contrasting with the S&P 500's projected annual growth of about 8%.

ServiceNow (NOW)

ServiceNow also exhibits a negative correlation of 79.5% to the 10-year yield. Analysts predict a significant annual EPS growth of over 20% for the next three years. However, there are no published estimates beyond 2026 on FactSet.

Other Tech Stalwarts

Not only Amazon and ServiceNow but other tech stalwarts like Nvidia, Microsoft, and Advanced Micro Devices (AMD), also fit this description. These companies surpass the S&P 500 in terms of expected profit growth while maintaining correlations of at least negative 60%.

Other Growth Names Outside of Tech

Apart from the tech sector, growth names like Tesla, Nike, Intuitive Surgical, and Align Technology also meet these criteria.

The discussions around Wall Street have been primarily focused on bonds and their impact on stocks. This provides food for thought.