Nvidia’s upcoming earnings report could be the next key catalyst for Big Tech stocks, Barclays (LON:BARC) strategists said in a note published Friday.
Amidst the various macroeconomic factors driving up cross-asset volatility in recent weeks, concerns about AI spending have further impacted equities. As such, Nvidia (NASDAQ:NVDA)'s Q2 earnings on August 28 will be closely watched, as they "may hold the fate of the Big Tech vs. rotation trade,” strategists noted.
“While AI-related capex from the Tech giants has generally been strong, investors are starting to question the high spending given actual AI revenues are likely to take longer to materialize,” they added.
Still, Barclays views the roughly 16% drop in European tech stocks, and the approximately 30% decline in some of its key players, such as ASML (AS:ASML), as potentially overdone. This outlook prompted them to re-enter European Tech with an overweight position this week.
The investment bank expresses a preference for the long-term secular growth potential and quality aspects that the tech sector offers, as opposed to the value-cyclical nature of other struggling sectors like Autos.
The recent sharp equity market movements have been intensified by the de-grossing of leveraged positions among systematic investors. Many leveraged trades involved shorting low-yielding Japanese yen assets to benefit from attractive carry.
However, following the Bank of Japan's rate hike and soft U.S. employment data, the rate differential has shifted in favor of Japanese assets, forcing investors to exit these carry trades, Barclays strategists explained. This has led to a sharp pullback in liquidity-driven markets.
The bank’s FX team suggests that yen weakness might resume once market positioning stabilizes and U.S. recession fears subside, but further yen appreciation is possible if the global rate-cutting cycle accelerates due to a recession. They observed a significant reduction in yen shorts ahead of the BoJ meeting and expect more closures since then.
“Price action may stay erratic given summer seasonality and elevated volatility,” strategists cautioned.
Nonetheless, they find the recent indiscriminate selling "excessive" and see buying opportunities for long-term investors.