Tech rout broadens, Euro and Sterling offered into ECB, BoE verdicts

The heavy software selloff triggered Tuesday by news that Anthropic is rolling out a new tool to handle legal and research work spilled over into the broader tech sector yesterday. Big Tech and semiconductors pulled back aggressively, sending the Nasdaq 100 below two key levels: its 100-DMA and the psychological 25K support.

AMD — which announced better-than-expected earnings — fell 17% yesterday, yes, 17%, down to the $200 support. Nvidia slipped 3.41%, while Google retreated more than 2% into its earnings and fell as much as 7% in after-hours trading immediately after the results were released before paring back losses.

Yet the earnings were great. The company generated over $113bn in revenue, roughly $2.5bn more than pencilled in. Cloud growth accelerated to 48% (!) — far above forecasts — confirming that its AI and cloud businesses are not only growing strongly, but even faster than sky-high expectations. And its AI, infrastructure investment pays off.

So what went wrong? The company said it will accelerate its capex spending to $175–185bn this year — massively above the roughly $120bn expected by analysts — which immediately cast a shadow over otherwise stellar results. Voilà.

The market continues to scream: stop spending. Big Tech continues to respond: we need to spend more to avoid running out of capacity amid the avalanche of AI demand and computing needs coming our way.

But at the end of the day, investors have the last word. If they want their Big Tech darlings to slow spending — and they express that feeling by sending stock prices into a freefall — spending will have to slow, regardless of expectations that computing needs will reach yottaflops in the next five years.

At this point, we have already collected important clues about what comes next. Meta, Microsoft and Google have reported so far — I am not counting Apple among AI plays. All delivered better-than-expected results, and all pledged to invest more — much more.

AI revenue and monetisation channels are notable at Meta and Google, especially for Google. The company offers TPU chips, which appear to be boosting cloud demand; it owns Waymo — the self-driving unit valued at $126bn — and it has a major partnership with Apple to bring Gemini to iPhones, potentially reaching around 2.5bn devices worldwide.

But when it’s no, it’s no. Investors don’t agree with current spending levels.

My guess is that if these earnings — and improved analyst expectations — can’t lift sentiment, it will be hard to prevent a broader selloff. A 10–20% pullback in the Nasdaq 100 looks plausible, which would take the index into the 20K–23.5K range.

The S&P 500 could outperform, benefiting from rotation into value names. Value stocks have been outperforming growth stocks by the widest margin since 2022. The S&P 500 equal-weighted index is catching up with the traditional market-cap-weighted, tech-heavy version.

Potential Federal Reserve (Fed) rate cuts could further support the rotation trade — toward value, cyclicals and non-US assets.

On that note, yesterday’s US ADP report came in weak — and weaker than expected. The US economy added just 22K private jobs in February, a very small number. It’s almost laughable when you consider that US GDP grew more than 4% last quarter. Relative to that pace, 22K job additions is quite rikiki, as the French would say.

The services PMI surprised to the upside, but the US 2-year yield eased, suggesting the soft jobs number tilted the balance toward the Fed doves.

This divergence between US growth and labour data reflects the fact that a large share of US growth is fuelled by AI investment. That spending boosts GDP — and judging by recent commitments, will continue to do so — but it does not necessarily create jobs in its early stages. On the contrary, it enables companies to cut costs and reduce headcount, as one person becomes capable of doing the work of an entire team with the help of AI tools.

Add potential weakness from trade disruptions, and the jobs outlook looks far from sunny.

The Fed pointed to a stabilising labour market at its latest meeting, but if job gains remain this weak, the Fed may have to play the rate-cut card — especially as new Fed leadership under Mr Walsh is likely to refrain from expanding the balance sheet. Rate cuts could instead be justified by the argument that AI boosts productivity, eases inflationary pressures, and puts more jobs at risk. Just as Warsh argues.

Fed funds futures now price around a 60% probability of a 25bp cut in June — about 5pp higher than before the ADP release. If Fed expectations turn more dovish — and credibly so — that would likely keep pressure on the US dollar and support major currencies.

Interestingly, the US dollar index has not followed the US 2-year yield lower since yesterday. Instead, it is gaining ground against the euro and sterling this morning. The EURUSD finds support near 1.1785 ahead of the European Central Bank (ECB) decision, while cable slips to a two-week low ahead of the Bank of England (BoE) verdict.

Both central banks are expected to keep rates unchanged, meaning the focus will be on guidance. Recent data point to slowing PMI readings and easing inflation. Euro-area inflation fell to 1.7%, below the ECB’s target, while core inflation eased to 2.2% from 2.3% a month earlier.

Slower growth and tame inflation could open the door to a more dovish ECB stance, provided the bank continues to anchor its outlook to incoming data. If so, EURUSD bulls may be forced to abandon the 1.20 target in favour of a retreat toward 1.15 over the next three months.

The BoE on the other hand should weigh in the still sticky inflation, a heavy fiscal policy and the bleak economic outlook.

What could keep euro and sterling bulls in the game is weak US-Dollar demand and a relatively more dovish Fed. This morning, however, traders appear to have regained an appetite for the greenback.