Senior Market Analyst
The Nasdaq is on course for a weekly drop of around 3%, its largest since June, as semiconductors lead a selloff driven by doubts over the returns on AI investment. Elevated Treasury yields hit tech stocks twice, lowering the value of future cash flows and raising the cost of financing the AI buildout. With hotter U.S. inflation data and an expected Federal Reserve rate hike in the mix, the AI spending story for tech stocks now runs straight into the bond market.
Fiona Cincotta, StoneX Senior Market Analyst, has more than 15 years of experience trading and analyzing UK, European and U.S. markets, combining fundamental and technical analysis. She covers forex, equities, commodities and crypto assets, tracking how inflation data, central bank policy and bond yields feed through to equity indices such as the Nasdaq.
Elevated U.S. Treasury yields hit tech stocks from two directions at once, compressing valuations and raising borrowing costs for the companies spending most heavily on AI. Hotter-than-expected readings on the U.S. consumer price index and producer price index have kept that pressure in place. "So that's a double hit to tech stocks. Not only have you got it impacting the value of future cash flows, but you've also got increased financing costs," Cincotta says. Growth companies are valued largely on profits expected years ahead, so a higher yield trims what those future earnings are worth today. Safe haven flows into U.S. Treasuries during the tech selloff have pulled yields back from their multi-decade highs, yet Cincotta stresses that "Treasury yields do remain elevated." For Nasdaq tech stocks, that leaves the bond market weighing on valuations at the same time as the AI investment case is being questioned.
According to Cincotta, "what's also creating the problem here is the timing, because this is all coming as well, at a time when interest rates are expected to rise." The Federal Reserve is expected to lift interest rates by 25 basis points at an upcoming meeting, pushing financing costs higher just as investors question how profitable large AI investments will be. Meta shows the scale of that spending, with third-quarter capital expenditure projected to more than double to $39.7 billion from $18.8 billion a year earlier. Fourth-quarter capital expenditure is projected at $41.1 billion, compared with $21.4 billion a year earlier. Meta's third-quarter earnings per share are expected to fall just over 15% year on year to around $6.11, despite revenue projected to rise 23.5% to $63.3 billion. Spending on that scale becomes more expensive to fund as rates climb, which is why capital expenditure sits at the center of investor attention for tech stocks. Consequently, higher Treasury yields and a tighter Federal Reserve sharpen the test of whether the AI buildout can deliver returns.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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Elevated U.S. Treasury yields are hitting Nasdaq tech stocks twice, by lowering the value of future cash flows and raising the cost of funding the AI buildout. With a Federal Reserve rate hike expected and Meta's capital expenditure projected to more than double, the cost of AI spending is under close watch.
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