By Lewis Krauskopf

NEW YORK (Reuters – U.S. technology and growth stocks have had a rough start to 2022. As investors look for reasons to trust the shares, they also need to be prepared for U.S. interest rates increases.

The information technology sector, which accounts for nearly 29% of the broader index’s weight, is down 5.5% year-to-date, including steep declines in shares of heavyweights such as Microsoft (NASDAQ:) and Nvidia (NASDAQ:), both off roughly 9%. The overall S&P 500 has fallen 2.7%.

Tech investors hope that a strong earnings season will help to ease some of the suffering. Many blame rising Treasury yields, expectations that the Federal Reserve would tighten its monetary policy and raise rates aggressively in an effort to combat inflation.

Investors will be watching how long-term U.S. Treasury yields increase as the Fed raises short-term rates. Rising yields will lead to a steeper discount on future profits. This can pressure stocks that are growing fast.

Will earnings, given the recent performance of tech companies here, be a saving grace for them? Walter Todd, Greenwood Capital’s chief investment officer, said: It will be fascinating to see how these tech companies respond over the coming month.

Fourth-quarter results season kicks into high gear next week, with overall S&P 500 earnings expected to climb 23.1%, according to Refinitiv IBES. The expected rise in technology sector earnings is 15.6% as the other segments have received more benefits from the economic recovery following pandemic lockdowns.

Companies in the S&P 500 growth index, which is replete with tech stocks, are expected to increase earnings 16%, compared to a 26% rise for the S&P 500 value index, more heavily weighted in banks, industrials and other economically sensitive companies, according to Credit Suisse (SIX:).

Higher interest rates can pressure stretched tech stock valuations, so companies must deliver remarkable numbers in the next weeks, stated Kim Forrest of Bokeh Kapital Partners, chief investment officer.

She said, “To make the stock price rise even in rising rates/falling multiple environments, you need to demonstrate demand for the product.”

The tech sector is trading at about 27 times earnings estimates for the next 12 months, near its highest in 18 years, compared to 21 times for the overall S&P 500, according to Refinitiv Datstream.

Netflix (NASDAQ): Shares have plunged more than 14% in the past year. On Thursday, Netflix reported the first results of the “FAANG” large-growth companies. Investors will monitor the plans of streaming giant Netflix and their outlook for subscribers.

“If they can surprise to the upside on the number of subscribers, I think that is going to be great for the stock price,” said King Lip, chief strategist at Baker Avenue Asset Management, which owns Netflix shares.

Adobe (NASDAQ.com), Salesforce.com and DocuSign (NASDAQ.) have both suffered losses of about 9% each.

Morningstar has seen a drop in the performance of the ARK Innovation ETF (which is made up growth stocks) which was previously the best-performing U.S. stock fund. It is currently down 16%.

However, not all people believe that Treasury yields will increase or that tech share investors should abandon shares of technology as the Fed increases rates.

Goldman Sachs’ analysts (NYSE:) expect the rise to 2% before the end of this year. This “suggests only a slight further move in long-term yields,” and “the likelihood that economic growth slows in 2022” is a reason for growth stocks.

After rising to 1.8% in the previous week, Friday’s yield for the 10-year Treasury Note was at 1.76%.

The study was conducted by Wells Fargo According to the Investment Institute (NYSE,:), the tech sector grew by an average 48.1% in five years of rising interest rates, since 1990.

Wells Fargo has given a positive rating to the technology sector as well as communication services and financials.

“This is all a very recent thing where people have almost talked themselves into tech as being rate sensitive,” said Sameer Samana, senior global market strategist at the Wells Fargo institute.