"Capital cost is the dominant constraint": Wedbush warns that high interest rates and oil price storms are reshaping stock selection logic.

Wedbush Securities analyst Seth Bashams report points out that the financial markets are increasingly affected by a high interest rate environment and energy price fluctuations, requiring investors to be more selective in their stock selections. In the report released on March 29th, Basham views the rising cost of capital as a core factor influencing valuations, emphasizing that "the cost of capital has become the dominant constraint." With the yield on the 10-year US Treasury bond exceeding 4.4% and limited expectations for rate cuts, he believes investors must adapt to a structural environment of high discount rates, which is putting pressure on stock valuation multiples. The report specifically focuses on the escalating pressure in the credit markets, particularly in the private credit sector related to the software industry. Basham warns that the technological disruption brought by Artificial Intelligence (AI) may erode the competitive advantage of traditional businesses and weaken borrowers' ability to repay. The report notes that the deterioration of fundamentals, combined with a wave of debt maturities concentrated between 2028 and 2031, could significantly increase refinancing difficulty. Meanwhile, market signals are flashing warnings. High volatility in the bond market limits the upward potential of the stock market, while a narrowing market breadth indicates a continuous decrease in the number of leading stocks. Basham believes that these circumstances are fundamentally different from past cycles - when central banks could provide strong support to the market by lowering interest rates. Possibility of rate hikes still exists Geopolitical risks in the energy market are also a key variable in Basham's outlook. The report lists various scenarios, from oil prices stabilizing relatively quickly, to a severe escalation causing crude oil to exceed $120 per barrel and leading to further rate hikes. Different scenarios have significantly different impacts on sector allocations: in a moderate environment, technology and cyclical sectors are favored; in a deteriorating situation, energy and defensive assets become preferred. Despite the overall cautious tone, Basham also points out that the volatility brought by the election cycle may ultimately create buying opportunities. Historical data shows that midterm election years often see more pronounced market corrections, but later in the year as uncertainty fades, the market typically closes with positive returns. Overall, the report advises investors to reduce their broad exposure to the overall market and instead focus on selected opportunities that align with the macro environment. In the background of high interest rates, credit pressure, and geopolitical uncertainty reshaping the investment landscape, precise timing and sector allocation will be key to success.