NASDAQ: NFLX – Rising Rates Are Hurting Stocks. The Threat Isn’t Going Away.

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Stocks have dropped as interest rates have jumped. This isn’t a one-time problem, but a continuing one that could get worse.

The

S&P 500

was down 1% from Tuesday’s intraday high on Thursday morning, in a move led by tech stocks. The Nasdaq-100, an index of large-capitalization tech companies, was down 2% from its peak two days earlier.

The culprit: The yield on 10-year Treasury debt jumped to 1.31% Thursday from 1.1% just a week ago. On Jan. 4, the day before Democrats won control of the Senate with victories in both Georgia runoff elections, the yield was 0.9%. Democratic control of the White House and both houses of Congress is expected to bring more government spending that would support the economy, but also could create inflation.

Higher rates make safe bonds more attractive relative to all stocks, but they weigh more heavily on growth equities, such as many tech firms, than on value stocks. Investors think about growth stocks in terms of the profits they are expected to bring in, rather than what they churn out now, so their valuations take a bigger hit than those of mature companies as rising rates erode the worth of future cash flows.

Netflix

stock (NFLX), for example, was down 3.6% from its Tuesday high on Thursday. The stock was trading at about 52 times the per-share earnings expected for the coming year, down from 54 times.

Importantly, higher inflation expectations reflect an improving economy, which also means faster growth in earnings. That benefits near-term profits for value companies, which are more economically sensitive than growth stocks are.

And there is plenty to be positive about on the economic front. Inoculations have ramped up and are expected to allow businesses such as restaurants and theaters to reopen. When they do, consumer demand will be waiting, given that the government is spending heavily to prop up the economy in the interim.

Most on Wall Street expect the 10-year Treasury yield to reach near 2% by the end of the year. Mizuho economists have predicted a yield of almost 1.8% by year-end, so the current rise in yields isn’t a surprise.

“The concern comes in if there are large and rapid spikes and the trajectory might go north of 2% on the 10-year Treasury yield,” Yung Yu Ma, chief investment strategist at BMO Wealth Management told Barron’s. Such spikes often happen around inflection points for inflation—times when the outlook can shift, which investors watch vigilantly.

The days when economic data are disclosed are an example. This week, retail-sales data showed a more than 5% pop in spending for January, putting estimates for around 1% to shame. The producer-price index, which measures inflation seen in goods bought by companies, rose 1.3%, compared with the expected 0.4%.

Companies could pass those costs on to consumers, a possibility investors will watch as more economic data lands. Inflation could force the Federal Reserve, which is promising historically low rates for several years, to raise the benchmark lending rate, or reduce the size of asset- purchasing program that have kept borrowing cost low, sooner rather than later.

Comments from Fed officials are another touch point for rate spikes.

“The number of potential catalysts for a sudden, disorderly rise in yields that hits stocks has risen,” wrote Tom Essaye, founder of Sevens Report Research in a note.

These spikes, of course, aren’t stocks’ biggest risk—virus mutations that don’t respond to vaccines would be far worse. Any losses they bring could represent buying opportunities.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com