Stock market's Golden Era may have reached its end in the U.S.?
Tech Sector Faces Challenges as Interest Rates Rise
In the dynamic world of finance, the tech sector is bracing for potential turbulence due to the US Federal Reserve's signaled interest rate hikes within the next two years. This development could pose challenges for tech companies, as rising interest rates typically exert downward pressure on highly valued tech stocks.
The reason for this is rooted in the way these companies operate. Tech stocks rely heavily on future earnings, which are discounted back to present value. As interest rates rise, these discount rates become less attractive, making the future earnings less desirable, and hence reducing the valuations of these stocks. Conversely, rate cuts tend to boost tech valuations by lowering discount rates and borrowing costs, enhancing future cash flow valuations.
In 2025, for instance, recent Federal Reserve rate cuts led to a resurgence in growth stocks, particularly in innovation-driven sectors like e-commerce and fintech, as lower rates spurred capital availability and investment in R&D.
While U.S. tech and mega-cap stocks have continued to lead market rallies in 2025, driven by strong earnings, particularly in AI and digital infrastructure sectors, recent outperformance of international equities suggests potential shifts in market leadership. This implies that interest rate trends materially impact tech stock performance, and regional dominance in equities could evolve depending on global economic and monetary policy factors.
Meanwhile, the competition in the global market continues to be intense. China, with its rapid progress in recent decades and ambitious goals, challenges the USA's status as the world's stock market powerhouse. In late 2020, when news of COVID-19 vaccines first emerged, value companies outperformed growth counterparts on global stock markets. This trend was particularly notable in high-market-cap value companies, which gained significantly more than their growth counterparts between November 2020 and January 2021.
The success of these tech companies, collectively known as FAANG, has largely contributed to America's rise to stock market dominance. The US tech sector, represented by companies like Amazon, Apple, Microsoft, Facebook, Netflix, and Google, has contributed around a quarter of the total return of the US S&P 500 index since 2009. However, a shift in interest rates could mark the end of the rally for richly priced tech stocks, with companies having high tangible assets and robust cash flow being potential winners.
In this evolving landscape, Europe, strong in traditional industry, could be a significant beneficiary of this sector rotation. Sector rotation could become a regional rotation in the following decade, giving other world regions, such as Europe, a significant advantage.
In summary, the future rules of the game in the market are yet to be determined. As the competition remains intense, it is essential to keep a close eye on global economic and monetary policy factors to navigate the ever-changing landscape of the stock market.
References: 1. Investopedia 2. CNBC 3. CNBC 4. CNBC
Investing in the stock-market, particularly tech stocks, could face difficulties as interest rates rise, as this trend usually results in a decline in the valuations of tech stocks due to less attractive discount rates. However, in 2025, federal rate cuts facilitated a resurgence in growth stocks, highlighting the impact of interest rates on tech stock performance.
