Tech Stocks Bounce Back as Rate Fears Ease

Tuesday’s swings highlight a midwinter shift in investor appetite to real-economy sectors such as banks over the past year’s favorites. The reassessment is being driven by investor expectations that Covid-19 vaccinations will pick up, broadening the scope of the economic recovery to a wider range of firms. The rise this month in U.S. interest rates is forcing a reassessment of the risks of holding shares that have risen sharply over the past year, intensifying longstanding valuation concerns. The yield on the 10-year U.S. Treasury note has risen more than a quarter of a percentage point so far this month, potentially raising borrowing costs for most companies and crimping profits.

The rebound following Mr. Powell’s testimony before Congress shows that while investors continue to believe U.S. stocks are the best place to invest for the long term, sensitivity about the impact of rising interest rates is acute.

“We’re seeing a nasty, violent rotation,” said

Mike Bailey,

director of research at FBB Capital Partners, an investment manager in Bethesda, Md.

The broader market rose, fueled by gains in energy, utility and financial shares. The Dow rose about 16 points, while the S&P 500 added 0.1%.

Tuesday’s early selling was heaviest in some of the shares deemed by investors to be likely pandemic winners and government-stimulus beneficiaries. Electric car maker

Tesla Inc.

fell as much as 13% just after the open and Covid-19 vaccine developer

Moderna Inc.

fell as much as 14%.

The declines moderated after Mr. Powell said in congressional testimony that inflation remains soft, quelling fears among some investors that the late February rise in interest rates might force an acceleration of central-bank rate-increase plans. Instead, Mr. Powell signaled that rates will remain low as the Fed seeks to bolster job growth. Tesla ended 2.2% lower and Moderna closed down 5.8%.

Tech selling has reduced the altitude of some of the biggest market winners of the pandemic, many from Silicon Valley. Some in the market saw signs that a retrenchment might be at hand with last month’s boom and bust in shares popular on social media forums such as

GameStop Inc.,

which fell 2.2% Tuesday.

“A lot of the stratosphere stocks are getting dragged down,” said Mr. Bailey of FBB Capital, “and after that the next layer down is the expensive tech stocks like Tesla.”

Indeed, the selloff is the flip side of an investment strategy that has made the tech companies favorites among small investors who have piled into stock and options trading over the past year, with the Nasdaq rising 44% in 2020 and setting 12 closing records in 2021.

But over the past month,

Apple Inc.

has fallen 9.5% and food delivery service

DoorDash Inc.

has declined 10%. Tesla, whose 743% surge last year highlighted the tech-led market rebound from the coronavirus selloff, is now down for 2021 and has lost around a quarter of its value since the electric-car maker said on Feb. 8 that it had spent $1.5 billion on bitcoin in an effort to boost returns on cash. The market reversal has extended beyond those firms into some of the biggest gainers from the work-from-home trend forced by Covid-19 restrictions, such as home-improvement retailers

Home Depot Inc.

and

Lowe’s

Cos. On Tuesday, Home Depot fell 3.1% after the Atlanta company said same-store sales, a measure adjusted for store count, would be flat to slightly up this fiscal year, compared with a 20% rise in the fiscal year that ended last month. Lowe’s fell 2.2%.

Smaller stocks, also a recent winner as investors bet that locally oriented U.S. firms would benefit from stimulus-fueled infrastructure spending, also tumbled. The Russell 2000 index of small stocks fell as much as 3.6% Tuesday before rallying to finish down 0.9%, deepening its slide this week to 1.6%. The index had risen 44% over the past six months, raising valuation concerns there as well.

The selling of the past week amounts to a “valuation reset for both small-caps and tech, considering the epic tear of both asset classes,” said

Jason Bulinski,

chief investment officer at First Midwest Bank.

Those concerns were pronounced enough to overcome what on another day could have been welcome news from the Fed. Mr. Powell signaled in prepared testimony before Congress that despite signs of recovery since the pandemic began, “the economy is a long way from our employment and inflation goals.”

Investors took the comment as a sign that any Fed interest-rate increases are “still several years away,” said

Paul Ashworth

of Capital Economics. The moderate tone softened the rush into banks, with the Nasdaq KBW Bank index of major U.S. lenders rising 0.9%. It is up 19% for 2021.

The shift away from pandemic favorites has offered a reminder of the risks of more-volatile investments. FBB Capital has been cautious on stocks and has been buying corporate bonds as one play on the changing environment, Mr. Bailey said.

Michael Scanlon,

a portfolio manager of the John Hancock Balanced Fund at Manulife Investment Management, has scaled back his fund’s equity holdings and has been selectively buying high-yielding investment grade corporate debt.

Yet rates remain low, the Fed remains on hold and inflation has yet to appear. Because of that, many investors are wagering that the selloff will soon pass and that the tech highfliers of recent years are due to resume their ascent.

Mr. Scanlon said his fund holds sizable stakes

Microsoft Corp.

, Google parent

Alphabet Inc.

and

Broadcom Inc.

“In this environment, you still want to own companies with dominant market shares and the ability to grow,” said Mr. Scanlon. “I don’t think that trade suddenly expires.”

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com