The stock market selloff deepened this morning in Asia. Stocks are down sharply, due to a combination of souring AI/tech sentiment, the unwinding of popular carry trades and renewed recession fears after Friday’s payrolls report. To be sure, payrolls growth in the US is slowing, but the labour market may not be as weak as the headlines suggest. The consternation around last Friday’s payrolls report looks overdone.
That major US stock indices are still up double digits YTD, underlines just how strong equity market performance has been this year, but also how far sentiment had become stretched. The S&P 500 was still trading at very rich levels, relative to US Treasuries, at the end of last month. A heavy concentration in Big Tech and semiconductors, had left the stock market over-exposed to a turn in sentiment.
AI exuberance had reached fever pitch. A deeper scrutiny of Big Tech capex plans, and scepticism as to whether AI can deliver the profits and productivity promised, has been long overdue. AI is proving to be incredibly expensive, with uncertainty lingering over expected returns on investment. Big Tech capex spending arguably represents a significant misallocation of capital, by hampering the transition to net zero.
Timing the market bottom is fraught with risks. But a significant easing has already taken place. The 2-year Treasury yield slid to 3.69% this morning, as did the 10-year Treasury yield. A 50bps cut at the next Fed meeting in September is certainly possible. It could take some time for the irrational exuberance in the Big Tech/AI trades to unwind, and the S&P 500 may have some way to fall before bottoming. The real economy, however, may yet prove resilient.
