Who Can Stop the Decline of Tech Stocks? Nomura: Midterm Elections Won't Help, Only the Fed Can

Author: Xu Chao, Wall Street Insights

Global tech stocks are mired in a correction, with the market generally hoping for a rebound following clearer policies after the U.S. midterm elections. 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 less than the market expects, 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 issues: the pressure on AI investment prospects and the ongoing concerns about credit. Against this backdrop, the brief rebound in 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 fall, 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 markets such as futures has significantly decreased; second, stocks of companies expected to be impacted by stricter regulations have not shown significant underperformance against 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 elections will not dissipate the uncertainty surrounding tech stocks, and those investors betting on a market rebound after the elections are likely to be disappointed.

Internal Rotation in the Tech Sector, Problems Run Deeper

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 are deeper logics that need to be clarified.

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

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

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

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

The Fed'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, clearly stating that underlying inflation has reached 2% and raised 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. 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 former interpretation. If next week's U.S. employment report exceeds expectations, it will raise expectations for Fed 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 pair dipping into the 157.5 to 158.0 range. This trend was somewhat unexpected—typically, a decrease in U.S. rate hike expectations should exert pressure on the dollar, but the easing of credit concerns led to 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 warned 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 forex positions indicate an increase in yen longs, 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 yen longs.

Only the Fed Stopping Rate Hikes Can Break the Stalemate

Matsuzawa clearly stated that it is currently difficult to find a catalyst that can rescue global tech stocks from their slump. Election results, sector rotations, and 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 Fed'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 investments will be difficult to dissipate.

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