Event Sniper | Valuation Framework for Tech Stocks Shifts—Cash Flow Is Now King

💡 Key Insight

1. The current pullback in US tech stocks does not reflect systemic risk unwinding, but rather a structural shift in the market’s pricing framework—the Nasdaq fell for the week2.13%, underperforming both the S&P and the Dow for two consecutive days, signaling ongoing investor de-risking from growth-heavy and AI-related assets; even with strong revenue and robust AI capital expenditure,stocks may still face repricing as long as free cash flow remains under pressure(Google’s earnings report serves as a case in point).

2. Investors should avoid pure AI-themed names with strained cash flows and instead pivot toward equal-weighted S&P exposure and sectors offering value-oriented defensive characteristics; this week’s earnings reports from Microsoft, Meta, Apple, and Amazon will be a critical test of whether concerns over AI investment returns can ease.

3. Hong Kong stocks rose against the broader trend1.63%, southbound funds have recorded net purchases ofHK$87.323 billionsince July, far exceeding the total for the entire month of June,indicating that the trend of medium- to long-term capital allocation into Hong Kong equities continues, fundamentally reflecting a rebalancing of capital following excessive concentration in global AI-related trades, compounded by near-term policy support ahead of the upcoming Politburo meeting in July.

4. The Federal Reserve is highly likely to hold rates steady at its July meeting,with the real policy pivot expected in September, when the Summary of Economic Projections (SEP) and the interest rate dot plot will be released simultaneously; currently, markets are pricing in a34% to 35%。

🔍 Valuation reset dynamics in US tech stocks

Last week, global markets showed significant divergence. U.S. equities weakened amid rising inflation expectations and earnings validation from major tech firms, with the Nasdaq falling2.13%, significantly underperforming the S&P 500’s0.61% decline and the Dow Jones Industrial Average’s relatively resilient performance; in contrast, Hong Kong stocks rose against the tide, with the Hang Seng Index gaining 1.63%, demonstrating rare relative resilience among major global markets. Meanwhile, escalating geopolitical tensions in the Middle East pushed oil prices above the psychological threshold of USD 100 per barrel, and the U.S. imposed new tariffs ranging from 10% to 12.5% on several trading partners.

The current pullback in U.S. tech stocksis not a concentrated release of systemic risk, but rather reflects a structural shift in the market’s pricing framework.On July 23, the Nasdaq plunged2.15%, with a drop significantly larger than the S&P 500’s1.21% and the Dow’s 0.97%.The following day, market divergence persisted: the S&P ended nearly flat, the Dow rebounded by 0.46%, yet the Nasdaq continued to decline by 0.64%.This two-day stretch of extreme divergence clearly shows that capital is continuously reducing exposure to growth-weighted and AI-related assets, rather than exiting risk assets across the board.。

The core logic behind this lies in the fact that even with strong revenue figures and continued upward revisions to AI-related capital expenditures,as long as free cash flow remains under pressure, share prices may still face downward revaluation.Google’s earnings report last week served as the clearest example: robust revenue failed to translate into higher stock prices, as the market instead grew concerned about the capital recovery cycle, depreciation pressures, and sustained strain on future free cash flow.Macro levelBrent crude breached $100 per barrel, and WTI surged nearly $10 in three days, directly fueling inflation concerns and expectations of further rate hikes;At the micro level,profit margins of large tech companies are being persistently eroded by massive investments in AI infrastructure. In the near term,the phase of one-sided, record highs for mega-cap tech stocks is unlikely to return; the broader index is expected to remain range-bound with a bearish bias, while sectoral divergence continues.。This week’s earnings reports from Microsoft, Meta, Apple, and Amazon will serve as a critical test. If they fail to effectively alleviate market concerns about the return on AI investments, the Nasdaq will likely face further pressure to digest its elevated valuations.

💡Investors should avoid pure AI-themed stocks with strained cash flows and instead shift focus toward equal-weight S&P indices and sectors offering value-oriented defensive characteristics.。

🔍 Hong Kong Market Resilience, Portfolio Rebalancing, and the Fed’s Policy Path

In stark contrast to the pressure on tech-heavy segments in both Hong Kong and U.S. equities, the Hong Kong market demonstrated notable relative outperformance last week.The Hang Seng Index rose for the full week1.63%, although average daily turnover of HK$270.4 billion was down HK$48.9 billion from the previous week, and net inflows via Stock Connect slowed week-over-week to approximately HK$2.978 billion, cumulative southbound net purchases since July have already reachedHK$87.323 billion, far exceeding June’s total ofHK$27.111 billion，indicating that the trend of medium- to long-term capital allocation into Hong Kong equities continues. From a sectoral perspective, semiconductors and AI hardware briefly benefited from rebound sentiment in overseas supply chains, but internet giants as a group failed to sustain coordinated momentum,and market leadership has shifted from pure valuation repair toward more nuanced rotation of capital among resources, financials, and select hard-tech sectors.。

The deeper logic lies in the global rebalancing of capital. Over the past several months, global AI-related trades have been overly concentrated in U.S., Korean, Japanese, and select A-share technology assets.Once deleveraging occurs in these highly crowded markets, Hong Kong equities—being undervalued, low-priced, and sufficiently liquid—naturally become a destination for reallocated capital.Meanwhile, with the Politburo meeting approaching in July, market expectations are that policy language will place greater emphasis onstabilizing growth and expanding domestic demandcompared to previous statements. Although a major policy pivot akin to that seen on September 24, 2024, is unlikely, an accelerated pace of policy implementation will still provide temporary support to financials, high-dividend stocks, and sectors directly tied to policy initiatives.

From a decision-making perspective, insufficient key data releases prior to the July meeting make it difficult to justify a clear policy shift; only after the meeting will core inflation data such as PCE be gradually released, thereby clarifying the policy path. Even if July proves more suitable as a pause that retains a hawkish bias, markets continue to price in a relatively high likelihood of a rate hike in September. Currently, the market-implied probability of a July FOMC rate hike stands at approximately34% to 35%and anticipates around55 basis pointsof cumulative rate hikes by spring 2027.The true policy inflection point is in September: By then, July CPI, PPI, and non-farm payroll data will help the Fed assess whether the disinflation observed in June is sustainable. The September meeting will also release the Summary of Economic Projections (SEP) and the dot plot for interest rates.

Sources: Investing, Zhongtai Securities, Industrial Securities

Investment Advisory Information

Yu Shilin, Licensed Representative, Central Entity Number: ATQ882

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