Who can stop the decline of tech stocks? Nomura: The midterm elections are useless, only the Federal Reserve can

Author: Xu Chao, Wall Street Journal

Global tech stocks are deeply mired in a correction, and the market generally hopes that the clarity of policies following the U.S. midterm elections will provide an opportunity for a rebound. However, Nomura Securities strategist Naka Matsuzawa poured cold water on this optimism. He clearly pointed out that the impact of the midterm election results on the stock market is far lower than market expectations, and the only catalyst that can truly end the decline of tech stocks is the Federal Reserve stopping interest rate hikes.

In his macro strategy weekly report on October 30, Matsuzawa predicted that during the week of the midterm elections on November 2, U.S. stocks would be weak, the bond market would be strong, the dollar would be weak, and the yen would be strong. He believes that the weakness of tech stocks is not rooted in election uncertainty, but rather in two deeper themes: the pressure on AI investment prospects and the ongoing fermentation of credit concerns. In this context, the brief rebound of semiconductor stocks lacks sustainability and breadth, making it difficult to drive a global recovery in the tech sector.

The Market Impact of the Midterm Elections is Overestimated

The mainstream market expectation is that if the Democratic Party wins both the House and Senate elections, U.S. stocks will decline, the bond market will rise, and the dollar will weaken, due to concerns that fiscal policy will become gridlocked and that AI-related regulations will tighten (including restrictions on data center construction).

However, Matsuzawa is skeptical about this. He pointed out two key pieces of evidence: first, the event premium surrounding the midterm elections in futures and other markets has clearly decreased; second, stocks of companies expected to be impacted by stricter regulations have not shown significant underperformance compared to the market. In other words, the current decline in tech stocks is not necessarily directly linked to concerns about regulatory tightening, and the election itself may not be the core driving force of the financial market.

He concludes that the end of the election will not dissipate the uncertainty surrounding tech stocks, and those investors betting on a market rebound after the election are likely to be disappointed.

Internal Rotation in the Tech Sector, Issues Deeper Than Surface

In the past week, there has been a clear divergence within the tech sector. Semiconductor stocks, which have led the decline since July, have rebounded, while previously resilient hyperscaler and software stocks have retreated.

Matsuzawa believes this cannot simply be characterized as a rotation of funds within the sector; there is a deeper logic that needs to be clarified.

Investors currently show two obvious tendencies: first, they do not particularly respond positively to better-than-expected core business revenue and earnings, but react harshly to results that fall short of expectations; second, compared to aggressive capital expenditure plans, the market prefers strategies that are restrained in investment, improve cash flow, and enhance shareholder returns. This reflects the market's deep concerns about the risk of a significant slowdown in AI investment.

Regarding semiconductor stocks, the U.S. semiconductor index SOX surged 6.9% this week, while Japanese and Korean semiconductor stocks have not yet truly emerged from their adjustments. Capital goods and machinery stocks—typically leading indicators of a recovery in AI investment expectations—have also shown no signs of improvement, further indicating that market confidence in AI investment prospects has not materially improved.

Credit Concerns and Federal Reserve Rate Hikes: Two Main Lines Affecting the Overall Situation

In the bond market, an intriguing phenomenon occurred this week: while credit concerns eased somewhat, U.S. long-term interest rates fell, while long-term rates in Japan and Germany rose. Matsuzawa attributes this divergence to the differences in hawkish and dovish outcomes of major central bank policy meetings relative to market expectations.

The Federal Reserve's recent statements were more dovish than market expectations, acknowledging that financial conditions have tightened; the European Central Bank also acknowledged tightening financial conditions but clearly signaled a rate hike in December; the Bank of Japan did not mention tightening financial conditions and explicitly stated that underlying inflation has reached 2%, raising its inflation forecast.

Regarding the easing of company credit concerns this week, Matsuzawa offered two interpretations: first, it is primarily driven by a decrease in expectations for U.S. interest rate hikes; second, the improved outlook for tech company earnings and IPOs has boosted market confidence in their financing capabilities. Given the weak performance of hyperscaler stocks this week, he leans towards the first interpretation. If next week's U.S. employment report exceeds expectations, it will raise expectations for Federal Reserve interest rate hikes and may reignite credit concerns, complicating the situation further.

Dollar and Yen: Credit Sentiment Dominates, Rate Hike Expectations Take a Backseat

In the foreign exchange market, the dollar strengthened this week, while the yen came under pressure, with the dollar/yen dipping into the 157.5 to 158.0 range. This trend is somewhat surprising—typically, a decrease in expectations for U.S. interest rate hikes should put pressure on the dollar, but the easing of credit concerns has driven rebounds in semiconductor and bank stocks, supporting the relative performance of the U.S. stock market and attracting previously withdrawn funds back into dollar assets.

Matsuzawa warns that if the rebounds in semiconductor and bank stocks lack sustainability, the logic of declining rate hike expectations will regain dominance, and the dollar will face significant downward pressure.

Regarding the yen, as of October 20, speculative foreign exchange positions indicate an increase in long positions on the yen, but the current position size is still only 39% of the peak during the U.S. tariff shock period in April 2025, suggesting that there is still considerable room for increasing long positions on the yen.

Only the Federal Reserve Stopping Rate Hikes Can Break the Stalemate

Matsuzawa clearly points out that it is currently difficult to find a catalyst that can rescue global tech stocks from their slump. Election results, sector rotation, individual earnings reports—none of these factors are sufficient to fundamentally change the operational logic of tech stocks.

In his report, he wrote, the most significant potential catalyst that can be identified at present is the end of the Federal Reserve's rate hike cycle. Until this premise is realized, tech stocks will continue to bear the valuation pressure brought about by tightening financial conditions, and doubts about the sustainability of AI investment will be hard to dissipate.

Regarding the future direction of the market, Matsuzawa maintains his previous core prediction: before the Federal Reserve's policy truly shifts, global tech stocks are unlikely to experience a substantial systemic rebound.