Is the Historic Tech Crash Driven by Panic Selling or a Real Cycle Turn?

Recently, global financial markets have experienced significant volatility, with cyclical stocks and momentum factors undergoing historic pullbacks, leading to heightened concerns about the peak of the economic cycle.

Andrew Sheets, the global head of fixed income research at Morgan Stanley, believes that the current sharp price adjustments are more likely indicative of a concentrated clearing of significant uncertainty rather than a precursor to the end of the economic cycle.

On a macro level, several key leading indicators have not signaled a peak in the cycle—the global manufacturing PMI remains strong, the U.S. yield curve is still positively sloped, and bank loan growth is rising in the U.S., Europe, and Asia.

Meanwhile, the Democratic Party's historic victory in the U.S. midterm elections could be a positive for the bond market: the slowdown in AI data center construction may extend the financing timeline, and downward pressure on energy prices may be reinforced as a result.

Morgan Stanley maintains its global growth forecast for the next 6 to 12 months, expecting U.S. economic growth to exceed 2% and Europe to exceed 1%. Andrew Sheets noted that the market could complete its adjustments before uncertainty fully dissipates, especially after valuation corrections have quietly persisted for some time.

No Peak Signals from Cycle Indicators

Andrew Sheets pointed out that the current market volatility resembles typical characteristics seen at the end of previous economic cycles, but several core indicators do not support this judgment.

The global manufacturing PMI continues to remain strong, with recent U.S. PMI data exceeding expectations; the U.S. leading economic indicators index shows signs of improvement; bank loans in the U.S., Europe, and Asia are all expanding; and credit fundamentals are continuously improving. The latest readings from Morgan Stanley's cross-asset team's cycle model indicate that the economy is still in a healthy range.

Another closely watched indicator—the yield curve—has also not issued warnings. Whether looking at the 2-year and 10-year or the 3-month and 10-year spreads, the yield curves in the U.S., U.K., Germany, and Japan all maintain a positive slope. This contradicts scenarios of excessive monetary policy tightening and an impending downturn in economic growth.

Andrew Sheets stated that historically, true cyclical turning points are rarely preceded by such robust patterns in the aforementioned indicators.

Midterm Election Impact on AI Construction Expectations

The Democratic Party's significant victory in the U.S. midterm elections flipped control of the House, Senate, and several governorships, including Texas and Ohio, achieving the strongest excess performance in national votes since 1974.

The election results have sparked market concerns that AI infrastructure construction may face stricter regulations. However, Andrew Sheets believes that while this risk exists, it is not the baseline scenario and is not a new issue.

Semiconductor stocks had already fallen about 30% from their June peak before election day. The Morgan Stanley research team has previously pointed out that bottlenecks in power and financing could slow the AI construction process and extend the cycle.

Even in the most pessimistic high-constraint scenario—assuming project approvals and power supply face greater challenges—the forecast for the compound annual growth rate of global data center capacity until 2030 still stands at 17%.

From the stock market perspective, the risks of delays in AI construction need to be weighed against the significant valuation adjustments that have already occurred. The forward P/E ratio of the S&P 500 has decreased by about 19% since the beginning of the year. Morgan Stanley equity strategists believe that this adjustment has been quietly underway within the market for quite some time.

Bond Market May Experience Dual Benefits

Andrew Sheets believes that the potential positive impact of the midterm election results on the bond market is more direct.

He pointed out that the two major pressures troubling the bond market this year—high energy prices and large-scale borrowing for data center construction—may be alleviated due to the election results.

• First, the slowdown in AI construction means that related financing needs will be spread over a longer time dimension, reducing the supply pressure that the market needs to digest in any single period.
• Second, according to election analysis cited by Vice President Vance, voter unease over the situation with Iran was one of the important factors influencing the election results. This may prompt the market to lower the risk premium for a further escalation of geopolitical conflicts—oil prices are currently about 17% lower than at the end of October.

The decline in energy prices is particularly critical for Europe. Morgan Stanley's interest rate strategists currently favor a steepening strategy for the European yield curve. Morgan Stanley's emerging markets strategists also noted that lower oil prices will improve the fundamentals of emerging markets from multiple dimensions.

Additionally, the general dissatisfaction among voters regarding inflation may further strengthen market expectations that tariff measures will ultimately prove to be temporary policies. At the same time, a larger majority in Congress is expected to reduce the space for individual legislators to obstruct, eliminating a factor of market volatility caused by previous congressional games.

Andrew Sheets concluded that the most critical question at present is: Is the market experiencing a true cyclical turning point, or is it approaching the end of a concentrated clearing of significant uncertainty?

His judgment leans towards the latter. Cyclical data still provides support, while the midterm election results may be alleviating the two biggest pressures facing the bond market this year. Morgan Stanley will continue to test this judgment with subsequent evidence.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.