To The Moon

Thursday’s brutal market sell-off exposed a growing problem for technology investors. The market is no longer questioning just how much companies are spending on artificial intelligence. It is beginning to question whether those investments can generate sufficient returns to justify current valuations.

The Nasdaq plunged 5.54%, QQQ dropped 6.49%, and the S&P 500 declined 4.36%.

Now investors face another major catalyst: the US employment report.

With consensus expecting approximately 60,000 new jobs compared with 29,000 previously, and unemployment forecast at 4.2%, Friday’s data could significantly influence expectations for Federal Reserve policy.

But I believe the market reaction will depend on more than the headline payroll figure.

There are three employment indicators worth watching, and each tells a different story.

1. Payrolls: Strong employment could become bad news for technology stocks

At first glance, stronger job creation should be positive. It suggests the economy remains resilient and businesses are still hiring.

However, stronger employment could also reduce expectations for interest rate cuts.

If investors believe the labour market remains too strong, Treasury yields could rise as expectations for monetary easing are pushed further out.

That would create additional pressure on high-valuation technology stocks, particularly companies whose valuations depend heavily on earnings several years into the future.

On the other hand, a weaker payroll number could support expectations of lower rates.

But there is a fine line between a healthy slowdown and an economy losing momentum.

I would prefer moderate job growth rather than a dramatic deterioration in employment.

2. Unemployment: The recession risk investors cannot ignore

The unemployment rate is equally important because it provides another perspective on labour market conditions.

If unemployment remains around 4.2%, investors may interpret this as evidence that the labour market is cooling gradually.

However, a significant increase could raise concerns about weakening consumer demand and slowing economic activity.

This matters even for the largest technology companies.

Microsoft, Amazon and Alphabet may benefit from long-term AI demand, but their cloud businesses and enterprise customers are not completely immune to a weaker economy.

Lower interest rates would not necessarily compensate for deteriorating earnings expectations.

3. Wage growth: The inflation signal that could move Treasury yields

Wage growth is the indicator I would pay particular attention to.

Slower employment growth does not automatically mean inflation is under control.

If wages continue increasing rapidly, inflation pressures could remain persistent, limiting the Federal Reserve’s ability to reduce interest rates.

For technology investors, this creates an uncomfortable combination:

• Higher Treasury yields could compress valuation multiples.

• Expensive growth stocks could face further repricing.

• Smaller AI companies with weaker cash flow could experience additional financing pressure.

• Speculative semiconductor and infrastructure stocks could become more volatile.

This is why I believe wage growth could be more important than the headline payroll number in determining the immediate market reaction.

4. The bigger problem: AI capital expenditure is facing a reality check

Employment data is only part of the story.

The technology sector is also confronting questions about the sustainability of AI infrastructure spending.

Hyperscalers have committed enormous amounts of capital to data centres, advanced chips, networking equipment and electricity infrastructure.

Companies such as Nvidia, AMD and Broadcom have benefited from this investment cycle.

However, investors are increasingly asking whether the returns will justify the spending.

Revenue growth is important, but so are operating margins, free cash flow and the time required to recover infrastructure investments.

If capital expenditure continues rising faster than the cash generated by AI services, investors may become less willing to reward companies simply for announcing larger spending budgets.

This could lead to a shift in market leadership.

Companies demonstrating measurable AI monetisation and strong cash generation may attract more interest than businesses relying primarily on future growth expectations.

5. Three possible outcomes for technology stocks

I see three broad scenarios:

Scenario A: Moderate payroll growth and cooling wages

This would probably be the most constructive combination for equities.

It could support expectations of monetary easing without signalling a major deterioration in economic conditions.

Technology stocks could find some relief, particularly if Treasury yields stabilise.

Scenario B: Strong payrolls and accelerating wages

This could create renewed pressure on growth stocks.

Investors may push rate-cut expectations further out, sending Treasury yields higher.

High-valuation AI and semiconductor stocks could face another round of multiple compression, even if their underlying businesses remain healthy.

Scenario C: Weak payrolls and rising unemployment

Initially, markets might welcome the possibility of lower interest rates.

However, if the data suggests a rapidly weakening economy, recession concerns could outweigh the benefits of monetary easing.

Companies exposed to enterprise spending, advertising and consumer demand could face downward earnings revisions.

In this scenario, even established technology leaders may struggle.

6. My investment strategy: Look beyond the first market reaction

I would avoid making major portfolio decisions based on one employment report.

For Nvidia and AMD, I would monitor semiconductor demand, customer spending commitments and evidence that AI infrastructure investment is translating into actual revenue.

For Microsoft, Amazon and Alphabet, I would focus on cloud growth, AI monetisation and free cash flow.

For speculative AI infrastructure stocks, I would be more selective. Companies with significant capital requirements and uncertain paths to profitability could remain vulnerable if interest rates stay elevated.

I would also watch the 10-year Treasury yield. A sustained decline could help support growth-stock valuations, but falling yields driven by recession fears would tell a very different story from falling yields driven by easing inflation.

My conclusion

Friday’s employment report could determine the market’s next short-term direction, but I do not think it will resolve the bigger uncertainty surrounding technology valuations.

The market is moving into a phase where investors may demand evidence of profitability rather than simply rewarding AI-related growth.

A softer jobs report could provide temporary relief, but the next sustainable technology rally will need two things: a more supportive interest-rate environment and convincing evidence that AI investment can deliver attractive returns.

The real question is no longer how much companies are spending on AI.

It is how much money they can ultimately make from it.

For discussion purposes only. Not financial advice.