The decision of the Federal Reserve's December interest rate meeting triggered a significant adjustment in US technology stocks, and some investors expressed caution and pessimism. We believe that the hawkish shift of the Federal Reserve's monetary policy reflects more on the current macroeconomic resilience and inflation stickiness, and its impact on the market is mainly short-term disturbances. Fundamental factors are the fundamental factors for the market's medium - to long-term trends. In the next 12 months, we will continue to maintain an optimistic view on the technology sector of the US stock market, with the software SaaS sector being our top pick, and the hardware& The semiconductor sector focuses on the two main lines of GenAI opportunity diffusion and cyclical industry recovery, while the Internet sector focuses on the first tier giants+highly elastic sub sectors (AD tech, Fintech, etc.). Due to the complex macro environment and other factors, we expect the high volatility of the US stock market since 2023 to continue. However, the market style will be more balanced in the future compared to 2024, and the market "width" is expected to significantly expand. It is necessary to observe more and move less, and patiently seek alpha returns at the individual stock level.
Background of the matter: Economic resilience& Inflation stickiness has led to a hawkish shift in the Federal Reserve and a significant pullback in US tech stocks.
Recently, the Federal Reserve announced the decision of its December interest rate meeting, which was expected by the market to cut interest rates by 25bps. However, the interest rate dot matrix chart indicates that there will be 2 interest rate cuts in 2025 (previously expected 4), 2 in 2026, and 1 in 2027, with a terminal interest rate of 3.125% (previously expected 2.875%). The hawkish level significantly exceeded market expectations and triggered a shock in US equity assets. The tech dominated Nasdaq index fell 3.56% on Wednesday, and the VIX index, which reflects market volatility, also jumped sharply. Some investors are also concerned about the prospects of the US tech sector. We believe that the slowdown in the pace of interest rate cuts by the Federal Reserve reflects more on the current resilience of the US economy and inflation stickiness. In the short term, the market cannot "fight against the Fed", and the market disturbance and volatility caused by the reset of Federal Reserve monetary policy expectations are difficult to avoid; In the medium-term dimension, the market trend of the US technology sector depends more on its own performance, including macroeconomic and industry operating cycles. Based on our assessment of the continued upward trend in sector performance, we will continue to maintain an optimistic view of the US technology sector in the next 12 months. At the same time, we expect the high volatility of the market since 2023 to continue, but the market style will be more balanced in the future compared to 2024, and the market "width" is expected to significantly expand. We need to patiently seek individual stock alpha returns.
Software SaaS: The rebound of enterprise IT spending and the acceleration of GenAI import are our top picks for the US technology sector in 2025.
The resilience of the US macroeconomy, coupled with the elimination of policy uncertainty after the election, shows signs of slow recovery in corporate IT spending. Although the pace of Fed interest rate cuts has slowed down, the cost of enterprise funds is still in a downward channel, and the relaxation of regulatory policies will also help restore the confidence of small and medium-sized enterprises. At the same time, the monetization of AI+software driven by agents is expected to accelerate in 2025. Coupled with the current attractive valuation level of 6.5X EV/S (NTM) in the sector, we consider the software SaaS sector as the first choice for investing in the US technology sector in 2025. We suggest focusing on: 1) application software, companies with low valuations and fast AI Agent import speeds; 2) Basic software, focusing on demand elasticity, balancing growth and profitability, with a focus on keywords such as consumption, SMB, data management, IT operations, etc; 3) Information security, with a focus on the opportunities for firewall hardware cycle updates in 2025.
▍ Hardware& Semiconductor: Focusing on the two main themes of GenAI opportunity diffusion and cyclical industry recovery.
The current global semiconductor industry is still in the middle of the upward cycle, dragged down by consumer electronics; The hardware fundamentals are expected to remain weak from Q4 2024 to Q1 2025 and resume upward momentum from Q2 2025. Similar to 2024, GenAI is expected to continue to be the core driving force, but industry opportunities are expected to continue to spread around Nvidia. At the same time, we also need to pay attention to the recovery progress of IT spending by European and American companies after the US election, the driving force of end-to-end AI and Windows 10 EOL on consumer electronics and bulk storage chips, as well as the bottom of the cycle in the automotive industry; The recovery process of the industrial sector, etc. Tariffs& Trade policy, US macro& Inflation data and advancements in GenAI technology are expected to continue to be the core influencing variables in the industry. At the sub sector level, our preference order is as follows: advanced processes, AI networks (Ethernet devices&high-speed interfaces), AI computing chips (ASICs, commercial GPUs), AI servers, enterprise IT equipment (network devices, high-end storage, general servers), consumer electronics (PCs, mobile phones), analog chips, semiconductor devices, bulk storage chips, mature processes, etc.
Internet service: the business cycle of performance continues to rise.
Macroeconomic resilience, combined with the improvement of operating efficiency brought by the continuous introduction of GenAI technology, we judge that the business cycle of the Internet sector in the US stock market is expected to continue to rise, which is reflected in online advertising, e-commerce, streaming media, local life, financial technology and other sectors. But the Trump administration imposed tariffs and; Industry regulatory policies, inflation data, and advances in AI technology are expected to be continuous disruptive variables that require close attention. At the individual stock level, front-line Internet giants will still be the basic configuration. Considering the penetration of GenAI technology and the relaxation of industry regulation, we suggest that investors moderately increase their allocation to small and medium-sized individual stocks in areas such as advertising technology and fintech to enhance portfolio resilience.
Risk factors:
The risk of re inflation in the US economy; Global geopolitical conflicts and trade tariff risks; The risk of unexpected global economic downturn; The risk of continuous tightening of regulation in the technology industry; The risk of AI technology progress falling short of expectations; Key technologies of enterprises, risks of talent loss, etc.
Investment advice:
The hawkish shift of the Federal Reserve's monetary policy reflects more on the current macroeconomic resilience and inflation stickiness, and its impact on the market is mainly short-term disturbances, with fundamentals being the fundamental factor for the market's medium - to long-term trends. In the next 12 months, we will continue to maintain an optimistic view of the technology sector in the US stock market and consider software SaaS as the preferred configuration for the sector. At the same time, with the continued volatility of the market and the continuous improvement of market "breadth", we also need to maintain a "look more, move less" approach and continuously focus on exploring opportunities at the individual stock level.