Technology stocks lead the market decline: the dual impact of concerns over Fed rate hikes and the retreat of the AI chip frenzy

Tech stocks lead market decline: Dual impact of Fed rate hike fears and AI chip craze receding

Global tech stocks have recently experienced a sharp sell-off, with the Nasdaq posting its biggest single-week drop of the year. The adjustment is driven by two main factors: hawkish signals from the Fed triggering a repricing of the rate path, and market doubts about the sustainability of AI-driven chip demand. Institutional investors are reassessing the valuation logic and allocation weight of the tech sector.

Market Background

Interest Rate Environment and Inflation Pressures

The core PCE inflation in the US for Q1 2025 remained above 3.2%, far exceeding the Fed's 2% target. Fed Chair Powell emphasized in recent public remarks that there is "no rush to cut rates," even hinting at a possible rate hike if inflation persists. Market expectations for the terminal federal funds rate have risen from around 4.5% to about 5.0%. The high interest rate environment directly compresses the valuation of growth stocks, especially tech companies that rely on discounting future cash flows.

Economic Fundamentals and Liquidity

US GDP growth slowed from 2.8% in 2024 to 1.6% in Q1 2025, but the labor market remains tight. Global liquidity continues to tighten as major central banks shrink their balance sheets. According to data from the Bank for International Settlements (BIS), global real interest rates have risen to their highest level since 2008.

Current Capital Flows

Funds Exiting the Tech Sector

According to EPFR Global data, as of April 2025, global tech equity funds have seen net outflows for three consecutive weeks, totaling over $15 billion. During the same period, defensive sectors such as utilities and healthcare attracted net inflows. In the ETF market, funds tracking the tech industry experienced large-scale redemptions, while value ETFs and short-term Treasury ETFs gained favor.

AI Chip Stocks Lead the Decline

Shares of leading AI chip companies have fallen more than 20% from their March highs, with valuations retreating to mid-2023 levels. Market concerns about the return on AI capital expenditure are intensifying: although corporate AI spending continues to grow, the pace is slowing. A Citigroup report noted that some cloud service providers have begun to scale back heavy investments in AI infrastructure.

Investment Logic Analysis

Return of Interest Rate Sensitivity

Tech stocks' sensitivity to interest rates has re-emerged in 2025. In a high rate environment, the present value of future earnings declines, putting pressure on high P/E stocks. Morgan Stanley research shows that if the Fed raises rates by another 25 basis points, the tech sector's valuation could be further revised down by 10%-15%.

Structural Divergence in the AI Theme

The long-term growth logic for AI remains unchanged, but the market is shifting from "concept speculation" to "earnings validation." BlackRock notes that the real winners will be companies that can turn AI into actual revenue and profit, not just hardware suppliers. The chip demand boom may have hit a short-term ceiling, but opportunities in software and AI application layers are emerging.

Institutional Investors' Strategy Adjustments### Strategic Adjustments by Institutional Investors

Pension funds and sovereign wealth funds have recently reduced passive index allocations, shifting toward active management. Goldman Sachs' prime brokerage data shows that hedge funds have been net sellers of tech stocks for five consecutive weeks, while increasing holdings in the energy and financial sectors. Family offices, on the other hand, are focusing more on long-term structural opportunities such as the energy transition and medical innovation.

Risk Factors

Macro Risks

If the Federal Reserve continues to raise interest rates, with further tightening in October or November, it could trigger a global recession. The International Monetary Fund (IMF), in its April 2025 *World Economic Outlook*, downgraded its global growth forecast to 2.8%, warning of escalating trade frictions and geopolitical tensions.

Policy Risks

U.S. export controls on semiconductors to China may be further expanded, affecting revenue from AI chips. European digital tax policies could also pressure the profits of multinational tech companies.

Geopolitical Risks

Uncertainty in the Taiwan Strait poses a potential shock to the global semiconductor supply chain. If the conflict worsens, chip shortages could re-emerge, though in the short term, it might instead boost the value of existing inventories.

Market Valuation Risks

Despite some pullback, the overall P/E ratio of the technology sector remains at the 85th percentile historically. If earnings expectations are revised downward, the room for valuation recovery is limited.

Long-Term Outlook

From a 3- to 10-year perspective, the dominance of tech stocks may persist, but the driving factors will shift. The AI infrastructure investment cycle may move from hardware expansion to software applications. Green computing and edge computing emerge as new themes. Institutional investors should focus on diversification: increasing allocations to non-U.S. tech markets, such as Japan and India. The World Bank predicts that global AI-related spending will exceed $3 trillion by 2030, but industry concentration will decline.

The intersection of the energy transition and digitalization is worth long-term positioning, for example, in smart grids and carbon management software. Sovereign wealth funds have already begun incorporating ESG factors into tech investment screening. In the future, growth stocks in a normalized interest rate environment will place greater emphasis on quality and cash flow.

In summary, the current adjustment is a result of the resonance between macro and industry cycles, not a reversal of the long-term trend. Institutional investors should use volatility to rebalance portfolios, focusing on structural trends and reasonable valuations.