Equities fall on tech pressures

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Equities extended their declines on Monday, with Asian benchmarks posting losses between 1.5% and 8% at the time of writing and the Stoxx Europe 600 opening 0.8% lower. The risk-off sentiment continues after US stocks and bonds fell sharply on Friday, driven by a confluence of factors, including media reports that Meta was set to raise equity, follow-through pressure after Broadcom’s underwhelming AI revenue outlook, a sharp unwinding in semiconductor stocks after the recent rally, and a stronger-than-expected US jobs report that intensified worries that the Federal Reserve could raise rates to head off inflation risks.

The S&P 500 fell 2.6%, ending the index’s nine-week winning streak. The tech-heavy Nasdaq was off 4.2% on Friday, for a weekly decline of 4.7%.

Selling was especially strong in semiconductors, where positioning and expectations had become stretched after the Philadelphia Semiconductor index rallied more than 80% from the end of March through early June. Notably, the equal-weighted S&P 500 index declined a more modest 1.4%, underscoring that the sell-off was driven largely by profit-taking in technology and semiconductor shares rather than broad-based weakness across the market.

Meanwhile, data showed that the US economy created 172,000 net new jobs in May, roughly twice the consensus forecast, while the unemployment rate held steady at 4.3%. That followed data earlier last week showing job openings at a two-year high. The strength of the US labor market—despite recent headwinds from higher energy prices—caused investors to increase expectations for tighter monetary policy. Markets are now fully priced for a 25bps hike by the Fed by the end of the year. The two-year US Treasury yield rose 11bps to 4.16%.

Sentiment has also been undermined by the lack of progress in talks between the US and Iran, alongside mounting evidence that the closure of the Strait of Hormuz has led to falling oil inventories and lower production. While US President Donald Trump is insisting that an agreement to end the wider war remains well within reach, Brent crude oil rose 4.4% to USD 97.2/bbl at the time of writing after Israel and Iran traded strikes over the weekend.

What do we think?
After the strength of the recent rally, a pullback in markets was to be expected, in our view. Nine consecutive weeks of gains had taken the S&P 500 to a fresh record high as of 2 June, with an advance of 11% year to date. Even after Friday’s decline, the index is still around 8% above its level prior to the launch of US-Israeli attacks on Iran on 28 February.

Despite renewed anxiety over rates, equity issuance, and geopolitics, we expect the rally to resume.

First, we do not expect investors to lose confidence in the AI outlook. Although tech stocks have come under pressure in recent days amid concerns about whether expectations can be met, business fundamentals remain strong. The demand for AI tokens, the basic unit of AI output, has continued to exceed supply even after recent years of heavy investment, and big tech's equity raises signal that AI capex overall is likely to remain high for some time. Our view is that continued AI adoption, alongside a healthy US consumer, should drive 20% earnings per share growth for the S&P 500 this year, supporting additional market gains over the medium term.

Second, we believe markets continue to overstate the hawkishness of top central banks. In our view, the risk of a Fed rate hike remains low, and despite the strong pace of jobs growth, we think the Fed is also likely to be reassured by the slowing of wage growth to 3.4% on the year, based on Friday’s data. For the Fed to raise rates, we would likely need to see an acceleration of economic growth, clear signs of faster wage increases, and indications that inflation is breaking out of its recent range. At present, none of these conditions has been met, and we expect signs of cooling core inflation—excluding food and energy—to allow the Fed to cut rates at its December meeting. Meanwhile, in the Eurozone, we expect a rate increase this week. However, we believe there will be only one further hike in 2026 after the June meeting, with policymakers being restrained by the drag to economic growth from higher prices.

Finally, while we believe the US-Iran conflict will continue to contribute to volatility, both sides have a powerful incentive to reach a compromise, with Iran eager to rebuild and growing pressure from the US Congress to end the war. The recent focus on a more limited framework to reopen the Strait, leaving the issue of Iran’s nuclear program for more detailed talks, could increase the chances of a breakthrough.

How to invest?
We continue to see the rally as well supported by fundamentals. At the same time, we encourage investors to use market strength to rebalance portfolios and diversify across various strategies:

Diversify across equities: Market performance has been driven primarily by a relatively small number of companies, increasing the potential risks to poorly diversified investors. In response, we recommend that investors consider diversifying more broadly, including by adding exposure to our preferred markets, which include Japan, emerging markets, China, global health care, Switzerland, and European consumer discretionary. We also favor diversifying across the AI value chain to areas such as global industrials and power and resources.

Lock in yields: While the rise in energy prices has added to risks of tighter central bank policy, our view is that markets have gone too far in pricing hikes. The recent sell-off in global bond markets therefore presents an opportunity for investors to lock in yields by adding to quality bonds, particularly in the short- and medium-maturity segment, in our view. In Europe, yields may remain volatile as the ECB tightens policy, so selectivity is important. Fiscal and inflation risks are higher in longer-duration debt. Equity income strategies and yield-generating structured investment strategies can further support diversified income.

Hedge market risks: The latest bout of volatility provides a reminder that markets can go down as well as up. Global equities have set new all-time highs, though residual risks remain, with the Strait of Hormuz still closed, rising AI competition, and elevated fiscal deficits. Investors can consider using periods of relative market calm to consider adding hedges to manage portfolio risks. This includes by replacing linear equity exposure with strategies offering a degree of downside protection. The goal is to reduce the risk of large drawdowns while maintaining participation in potential rebounds.