"If You Sell Now, You'll Regret It"... Wall Street Picks the Day U.S. Tech Stocks Rebound [Weekend Money]

Technology Stocks Correct Amid High Interest Rates and Rising Borrowing Costs
Term Premium Must Fall and Monetary Tightening Must Peak
Rebound to Begin as Liquidity Improves and Inflation Stabilizes

Analysts say the recent volatility in artificial intelligence (AI) and technology stocks, which had been leading U.S. equities, is driven not by weak earnings outlooks but by concerns over financing as high interest rates become entrenched. Analysts expect technology stocks to form a bottom and begin a sustained rebound once the term premium declines and the peak of monetary tightening is confirmed after the midterm elections.

According to Hanwha Investment & Securities on October 31, the recent correction in U.S. technology stocks has resulted from persistent high interest rates and concerns over rising borrowing costs, which have weighed on share prices more than worsening corporate earnings outlooks. The firm said capital scarcity had come to dominate market sentiment as borrowing by big tech companies and hyperscalers, along with their issuance of public corporate bonds, surged.

In this episode, instead of the usual pattern of rising interest rates pushing stock prices down, a sharp decline in stock prices has actually pulled interest rates lower. As risk aversion grew following the steep drop in technology stocks, funds flowed into bonds, a safe-haven asset, pushing Treasury yields down. Analysts, however, noted that this was not a broad-based bear-market shift but a selective rotation of funds into defensive stocks, such as healthcare and consumer staples.

For technology stocks to confirm a bottom, the term premium must decline and monetary tightening must have peaked. A divided Congress following the U.S. midterm elections would be the most favorable outcome for equities and would increase the likelihood that the correction in AI stocks is nearing an end. Even a Democratic sweep of Congress could stabilize the term premium, which surged following Donald Trump's election as U.S. president. The tightening trend in the Financial Conditions Index (FCI) also needs to stop, and inflation expectations need to stabilize.

A sustained rebound will come when liquidity improves and inflation stabilizes. It will need to be supported by net policy rate cuts by global central banks and improved excess liquidity among the G10 countries. Inflation also needs to trend downward and stabilize, alongside falling oil prices.

Shin Seung-yoon, an analyst at Hanwha Investment & Securities, said, "A downward revision to hyperscalers' capital expenditure (CAPEX) guidance and the possibility that the U.S. Federal Reserve (Fed) will raise interest rates next year could push stocks below their bottom. If big tech companies with bargaining power adopt a conservative CAPEX stance or lower hardware unit prices, that could provide a pretext for a correction." He added, "If the war in Iran has not ended after the midterm elections, the market will focus on whether inflation stabilizes."

This content was produced with the assistance of AI translation services.