CITIC SEC: How do you view the US technology stocks after the "hawkish" rate cut by the Fed?

CITIC SEC released a research report, stating that the decision of the Federal Reserve's December interest rate meeting triggered a significant adjustment in US technology stocks, causing some investors to express caution and pessimism. The shift to a more "hawkish" stance in the Federal Reserve's monetary policy reflects the current macroeconomic resilience and inflation stickiness, with more short-term disturbances in the market. The underlying fundamentals are the main factors determining the market's medium to long-term trends. Over the next 12 months, they continue to maintain an optimistic view of the US technology sector, with the software SaaS sector being the top pick, and the hardware & semiconductor sector focusing on GenAI opportunities and the recovery of cyclical industries, while the internet sector focuses on leading companies and high-elasticity subsectors (AD tech, Fintech, etc.). CITIC SEC's main points are as follows: Background: Economic resilience & inflation stickiness leading to a "hawkish" shift in the Federal Reserve, and a sharp pullback in US technology stocks. The Federal Reserve recently announced the decision of its December interest rate meeting, as the market had previously expected a 25bps rate cut, but the dot plot indicated 2 rate cuts in 2025 (previously expected 4), 2 in 2026, 1 in 2027, with a terminal rate of 3.125% (previously expected 2.875%). The degree of "hawkishness" significantly exceeded market expectations, prompting a major shakeup in US equity assets, with the tech-heavy Nasdaq index falling 3.56% on Wednesday, reflecting a sharp rise in market volatility as seen by the VIX index. Some investors also expressed concerns about the outlook for US technology stocks. CITIC SEC believes that the slowing pace of rate cuts by the Federal Reserve more reflects the current resilience of the US economy and inflation stickiness. In the short term, the market cannot "fight against the FED," and market disturbances and volatility resulting from the reset of FED monetary policy expectations are unavoidable. In the medium term, the market trend of the US technology sector depends more on its own performance, including macroeconomics, industry operating cycles, etc. Based on the judgment of the sector's performance continuing to rise, they will continue to maintain an optimistic view of the US technology sector over the next 12 months. They also expect the high volatility seen since 2023 to continue, but the market style will be more balanced than in 2024, with market "breadth" likely to significantly expand, requiring patience to find stocks with alpha returns. Software SaaS: Enterprise IT spending rebound, accelerated adoption of GenAI make it the top pick for the US technology sector in 2025 The resilience of the US macroeconomy, coupled with the elimination of policy uncertainty post-election, shows signs of a slow recovery in enterprise IT spending. Although the pace of rate cuts by the FED has slowed, enterprise funding costs are still in a downward trend, and regulatory loosening also helps restore the confidence of small and medium-sized enterprises. Additionally, the monetization of AI+ software driven by Agent is expected to accelerate in 2025, combined with the sector's currently attractive valuation level [6.5X EV/S (NTM)], making the software SaaS sector the top choice for investment in the US technology sector in 2025. Key areas to focus on: 1) Application software companies with low valuations and fast AI Agent adoption speed; 2) Basic software, focusing on demand elasticity, balance of growth and profitability, and keywords like consumption, SMB, data management, IT operations, etc.; 3) Information security, with a focus on firewall hardware update opportunities in 2025. Hardware & Semiconductor: Focus on the two main lines of GenAI opportunity diffusion and cyclical industry recovery The global semiconductor industry is still in the middle of a cyclic upswing, with global semiconductor & hardware fundamentals expected to remain weak from 2024Q4 to 2025Q1, and begin to recover from 2025Q2. Similar to 2024, GenAI is expected to remain a core DRIVE, but industrial opportunities are expected to continue to expand around NVIDIA. Additionally, attention needs to be paid to: the recovery pace of European and American enterprise IT spending post-election, the pull of end-side AI, windows10 EOL on consumer electronics, bulk storage chips, and the recovery process of automotive & industrial sectors at the bottom of the cycle. Tariffs, trade policies, US macro & inflation data, GenAI technological progress, etc. are expected to continue to be the core variables affecting the industry. At the segment level, CITIC SEC's preferences in order are: advanced process, AI networks (Ethernet devices & high-speed interfaces), AI computing chips (ASIC, commercial GPUs), AI servers, enterprise IT equipment (network devices, high-end storage, general servers), consumer electronics (PCs, phones), analog chips, semiconductor equipment, bulk storage chips, mature processes, etc. Internet Services: Continued upward trend in performance cycle With the resilience of the macroeconomy and the continuous introduction of GenAI technology to enhance operational efficiency, the performance cycle of the US internet sector is expected to continue to rise, reflected in online advertising, e-commerce, streaming media, local life, fintech, etc. However, variables such as Trump administration tariffs & industry regulatory policies, inflation data, AI technological progress are expected to continue to be disruptive and require close monitoring. At the individual stock level, leading internet giants will still be the basic allocation. Considering the penetration of GenAI technology and the relaxation of industry regulations, we recommend that investors modestly increase their allocation to mid-cap and small-cap stocks in areas such as advertising technology and financial technology to enhance portfolio flexibility. Investment Recommendations The shift to a more "hawkish" stance in the Federal Reserve's monetary policy reflects the current macroeconomic resilience and inflation stickiness, with its impact on the market being more short-term disturbances. The underlying fundamentals are the key factors determining the market's medium to long-term trends. Over the next 12 months, they continue to maintain an optimistic view of the US technology sector, with software SaaS being the preferred sector for investment, alongside the continuation of market volatility and the continuous improvement in market "breadth," they need to maintain a "watch more, act less" approach, and constantly focus on exploring opportunities at the individual stock level. Risk Factors Risks of US economic re-inflation; global geopolitical conflicts, trade tariff risks; global economicExpected downside risk; continued tightening of regulations in the technology industry; risk of slower-than-expected progress in AI technology; risk of key technology and talent loss in enterprises and other risks. "Quiero ir al parque esta tarde." "I want to go to the park this afternoon."