Tech Selloff Won’t End With Midterms, Only Fed Pivot Can Stop It: Nomura

Tech Selloff Won’t End With Midterms, Only Fed Pivot Can Stop It: Nomura

TREE NEWS reports: Global technology stocks remain mired in a deep correction, and investors hoping for a post-midterm election rebound are likely to be disappointed. In a macro strategy note dated October 30, Matsuzawa argued that the midterm election results will have a far smaller impact on equities than the market expects, and that the only real catalyst capable of ending the tech rout is the Federal Reserve halting its rate hikes.

Matsuzawa predicts that during the week of the November 2 midterms, US equities will be soft, bonds will be firm, the dollar will be weak, and the yen will be strong. He believes the weakness in tech stocks stems not from election uncertainty but from two deeper themes: mounting concerns over the sustainability of AI investment and persistent credit worries.

Midterm Election Impact Overstated

The consensus view holds that if Democrats win both chambers, US stocks would fall, bonds would rise, and the dollar would weaken on fears of fiscal policy gridlock and tighter AI-related regulation, including restrictions on data center construction. Matsuzawa is skeptical. He points to two key pieces of evidence: event premiums around the midterms in futures markets have fallen noticeably, and stocks expected to be hit by stricter regulation have not significantly underperformed. In other words, the tech selloff is not necessarily tied to regulatory fears, and the election itself may not be the core driver of financial markets. He concludes that the end of the election will not dispel the uncertainty hanging over tech stocks, and investors betting on a post-election rally are likely to be disappointed.

Sector Rotation Masks Deeper Problems

Over the past week, the tech sector has shown clear divergence. Semiconductor stocks, which have led the decline since July, rebounded, while previously resilient hyperscaler and software names pulled back. Matsuzawa argues this cannot simply be characterized as sector rotation; deeper logic is at play. Investors are showing two clear tendencies: they are not particularly impressed by revenue and earnings beats in core businesses but react harshly to misses, and they prefer restrained investment, improved cash flow, and higher shareholder returns over aggressive capital expenditure plans. This reflects deep-seated concerns about a significant slowdown in AI investment. The Philadelphia Semiconductor Index (SOX) surged 6.9% this week, but Japanese and Korean semiconductor stocks have yet to emerge from their correction. Capital goods and machinery stocks—typically leading indicators of an AI investment recovery—have also shown no improvement, further indicating that confidence in the AI investment outlook has not materially recovered.

Credit Concerns and Fed Hikes: Two Key Threads

In bond markets, a curious phenomenon emerged this week: credit concerns eased, yet long-term US rates fell while long-term Japanese and German rates rose. Matsuzawa attributes this divergence to differing hawkish-dovish tones from major central bank meetings relative to market expectations. The Fed sounded more dovish than expected, acknowledging tighter financial conditions; the ECB also acknowledged tighter conditions but explicitly signaled a December hike; the Bank of Japan did not mention tighter financial conditions, stated that underlying inflation has reached 2%, and raised its inflation forecasts. For the easing of corporate credit concerns this week, Matsuzawa offers two interpretations: one driven mainly by lower US rate hike expectations, and the other by improved confidence in tech companies’ financing capacity following earnings and IPO prospects. Given the weak performance of hyperscaler stocks this week, he leans toward the former. If next week’s US jobs report beats expectations, it would push up Fed hike expectations and could reignite credit concerns, complicating the picture.

Dollar and Yen: Credit Sentiment Dominates

In foreign exchange, the dollar strengthened this week while the yen came under pressure, with USD/JPY testing the 157.5-158.0 range. This is somewhat surprising—lower US rate hike expectations would typically weigh on the dollar, but easing credit concerns lifted semiconductor and bank stocks, supporting relative US equity performance and attracting previously departed capital back into dollar assets. Matsuzawa warns that if the rebound in semiconductor and bank stocks lacks sustainability, the logic of lower rate hike expectations will regain dominance, and the dollar will face significant downward pressure. As for the yen, speculative FX positioning data as of October 20 shows a modest increase in yen longs, but the position size is still only 39% of the peak during the April 2025 US tariff shock, suggesting substantial room for yen longs to build.

Only a Fed Pause Can Break the Deadlock

Matsuzawa explicitly states that it is difficult to find a catalyst capable of rescuing global tech stocks from their slump. Election results, sector rotation, individual earnings—none of these factors are sufficient to fundamentally change the operating logic of tech stocks. He writes that the most important identifiable potential catalyst is the end of the Fed’s hiking cycle. Until that happens, tech stocks will continue to face valuation pressure from tightening financial conditions, and doubts about the sustainability of AI investment will be hard to dispel. He maintains his core forecast: before the Fed truly pivots, global tech stocks are unlikely to stage a substantial, systematic rebound.

Key Takeaways for Investors

• Don’t count on a post-midterm rally in tech stocks; the election is not the main driver of the current selloff.
• The real overhang is AI investment sustainability and credit conditions, not regulatory uncertainty.
• Watch the Fed: a pause in rate hikes is the only clear catalyst for a sustained tech rebound.
• In FX, credit sentiment is currently outweighing rate differentials; a sustained rebound in semis and banks is needed to keep the dollar supported.
• Short-term volatility is likely to persist, with bonds and the yen favored over equities and the dollar in the near term.