Tech rally faces 3 September tests as bond yields peak

Rising US long-dated Treasury yields and Anthropic's weaker-than-expected annual recurring revenue have disrupted the tech rally since August, but analysts expect both pressures to ease from mid-September, opening what they call a decisive window for the sector.

"The recent volatility in global tech stocks stems from the rapid rise in long-dated bond yields and Anthropic's ARR miss," analysts at Chinese brokerage 尧望后市 wrote in a research note. "These concerns should begin to ease from mid-to-late September."

Oil at $93 a barrel is more likely to fall than rise as US strategic petroleum reserves deplete and political pressure builds ahead of midterm elections, easing inflation expectations. Recent US employment, inflation, and consumer data have also been weakening, and the rise in long-dated yields itself tightens financial conditions, reducing the need for further Fed rate hikes. Since 1990, the Fed has never made a hawkish policy shift in the second half of an election year.

The stakes are high. Tech stocks have been the primary driver of global equity gains this year, with earnings - not valuations - accounting for most of the advance across US, Chinese, Japanese, and South Korean markets. If the September pressures ease as expected, the sector could see a second wave of macro liquidity support, following the micro liquidity relief in July.

Three Pressures Set to Ease by Mid-September

The first pressure is oil. At $93 a barrel, crude prices are more likely to fall than rise as US strategic petroleum reserves deplete and political pressure builds ahead of the midterm elections. Lower oil prices would ease inflation expectations and reduce upward pressure on long-dated yields, which have climbed to a two-decade high.

The second is the Federal Reserve. Recent employment, inflation, and consumer data have been weakening. The rise in long-dated yields itself tightens financial conditions, reducing the need for further rate hikes. Since 1990, the Fed has never made a hawkish policy shift in the second half of an election year. The analysts expect rate hike expectations to be repriced lower, helping long-dated yields peak and decline in September-October.

The third is Anthropic's IPO. Polymarket prices an 82 percent probability of Anthropic listing by the end of October, with a 16 percent chance by the end of September. Under SEC rules, the company must publicly file its prospectus at least 15 days before the roadshow begins, which would disclose clearer ARR calculations and financial data. This could provide the market with the transparency needed to reassess AI returns on invested capital, a key concern driving recent volatility.

Key observation windows include Fed Chair Kevin Warsh's Jackson Hole speech next week, the latest inflation and employment data in late August and early September, and the FOMC meeting in mid-September. The Treasury's decision to double its long-end buyback program to $4 billion per operation - which initially sent the 30-year yield down 9 basis points before the move reversed - highlights the administration's struggle to control long-dated borrowing costs.

Earnings, Not Valuations, Drive the AI Rally

Longer term, even if fiscal expansion and AI-related bond issuance push global interest rates higher, industry trends remain the dominant driver of the AI rally, the analysts said. Historical precedents support this view. The 1990s dot-com rally offers a striking parallel: after the Kosovo War in 1999, the Fed began a rate-hiking cycle in the second half of the year, yet the tech rally not only survived but accelerated, with the steepest gains occurring during the period of consecutive rate hikes. New energy stocks similarly rallied in 2021 despite rising bond yields, driven by earnings momentum.

The analysts decomposed year-to-date returns of major tech markets into earnings and valuation contributions. Across the US, China, Japan, and South Korea, earnings accounted for the majority of gains, with valuations contributing little or even dragging returns. The same pattern holds for A-share tech sectors: computing hardware and advanced manufacturing rose on earnings strength, while valuation multiples compressed.

On positioning, the analysts recommend focusing on high-quality hard tech assets including optical modules, PCB, and fiber optic cables in the North American computing chain. They also flag other under-priced opportunities in non-ferrous metals, AI upstream equipment, innovative drugs, and new energy sectors including battery storage and grid infrastructure.

This article is for informational purposes only and does not constitute investment advice.