The fact that borrowing costs for the U.S. corporate world have risen sharply is showing its ugly face, and artificial intelligence, which has been driving the rise of U.S. stocks this year, can no longer provide optimism at this moment.
Que Nguyen, chief investment officer of equity strategy at Research Affiliates, pointed out that higher capital costs are not conducive to stock valuations.
He said that large technology companies are quite unique in that they have low leverage, abundant cash flow and wide moats. These characteristics give them above-average valuations, but at a certain point, neither absolute nor relative valuations can expand any further. , and now it seems we are approaching that moment.
Top-heavy U.S. stocks
Federal Reserve Chairman Powell said after the interest rate meeting in September that the Federal Reserve is committed to reducing the inflation rate to 2%, but there is still a long way to go. The Fed will proceed cautiously in deciding whether to continue raising interest rates.
Ian Lyngen of BMO Capital Markets wrote in a report that one of the Fed's responsibilities is to defend the U.S. economy, but Powell faces the risk of exaggerating optimism and risk assets are actually vulnerable to rising real yields.
The Nasdaq 100 index, which is dominated by technology stocks, has fallen by more than 5% since September. Its downward trend seems to have stopped, and investors predict that it may have its worst monthly performance in 2023. What's dangerous is that the index's price-to-earnings ratio is over 31 times, well above the average over the past decade.
Torsten Slok of Apollo Global Management warned that this year's rebound in U.S. stocks is unsustainable. Financing costs are expected to remain high and cross-asset investors should prepare accordingly, he said.
He added that the cost of capital will exert an increasing impact on businesses, and the market will see more companies default and more consumers will default on their payments.
