In a note to clients published Monday, Nomura analysts discussed the potential risk of a collapse in U.S. tech stocks and rate cut expectations.
The investment bank notes that the recent sharp decline in tech stocks was largely driven by the Fed’s hawkish shift during the June FOMC meeting, adding that this is no longer a factor in play.
Looking ahead, analysts suggest that the upcoming earnings reports from key U.S. tech companies could play a key role in determining market sentiment. More concretely, they believe that once the earnings reports are priced in, markets “will turn risk-on.” This, in turn, could shift the outlook on rate cuts.
“If momentum turns risk-on in response to earnings reports from key U.S. tech companies, Fed rate cut expectations could be partially reversed,” the report states.
But while some tech companies’ earnings reports have been strong, they haven’t been as robust as the market had expected, “and at least were not enough to provoke concerns about a downturn,” analysts argue.
“Since tech stocks rose sharply and became very overvalued in April-June due to the excess liquidity-driven market, the Fed’s hawkish shift spurred a rotation to undervalued sectors,” they added.
The Fed’s move to reduce its forecast for the number of rate cuts in 2024 from three to one added pressure on these stocks, leading to a rotation towards undervalued sectors.
According to Nomura, this was intensified by the unwinding of global carry trades following the Bank of Japan’s notably hawkish stance in July, pushing some markets to levels that factored in a potential economic downturn.
The report also addresses the Fed’s potential rate cuts, noting that while Fed Chair Jerome Powell signaled a willingness to cut rates as early as September, the timing and extent remain uncertain.
The OIS market has already priced in a significant probability of a 50-basis-point rate cut, but Nomura points out that this may be more of a hedge against economic downturns than a firm expectation.
“In other words, if time passes without this risk materializing, these expectations would gradually fade from the market.”
