Japan’s latest wage negotiations delivered another strong outcome, with pay increases exceeding 5% for a third consecutive year , reinforcing expectations that the central bank may proceed with further policy tightening . Strong Wage Momentum Continues Japan’s largest labour federation, Rengo, reported: Average wage increase: 5.26% Base pay growth: 3.85% While slightly below last year’s initial 5.46%, the result still signals sustained wage momentum , a key condition for Japan’s long-awaited demand-driven inflation cycle . BOJ Rate Hike Expectations Firm The strong wage data supports the Bank of Japan’s (BOJ) path toward policy normalisation. Markets are pricing a ~64% probability of a rate hike in April The BOJ has indicated it may act if inflation trends remain intact despite external shocks This keeps Japan on track for a gradual tightening cycle , after years of ultra-loose monetary policy. Inflation Dynamics Backed by Wage Growt...
The long-standing relationship between Big Tech and the broader market has broken down — and that may signal a new opportunity for investors.
Correlation Breakdown Signals Market Shift
For the first time in years, the Magnificent Seven and the equal-weight S&P 500 have decoupled, with correlation turning negative since late February.
This shift suggests:
- Big Tech is no longer moving in sync with the broader market
- Market leadership could rotate back to tech stocks
Historically, such divergence has preceded strong outperformance from Big Tech.
Big Tech Lagged — But Now Looks Attractive
Before the recent shift, Big Tech had underperformed:
- Magnificent Seven index fell 7.3% (Oct–Feb)
- Equal-weight S&P 500 rose 8.9%
This was driven by concerns over:
- Heavy AI spending (capex concerns)
- Slowing momentum in key names like Nvidia
However, the pullback has reset valuations:
- Valuation dropped to <25x earnings, below long-term averages
- Positioning has been washed out, reducing downside risk
Earnings Strength Remains a Key Advantage
Despite recent weakness, Big Tech continues to deliver:
- Expected earnings growth of 19% in 2026
- Compared to 14% for the rest of the S&P 500
This reinforces the sector’s structural profitability advantage, making it attractive in uncertain environments.
AI Spending Concerns Still a Headwind
Investors remain cautious due to:
- Declining free cash flow from heavy AI investments
- Combined FCF for major tech firms expected to drop to US$94B in 2026 (vs US$205B in 2025)
Additionally, Nvidia’s momentum has stalled, raising questions about whether AI growth expectations are too optimistic.
Macro Environment Could Support Tech Rebound
With geopolitical tensions rising and global markets turning volatile:
- Capital may rotate back into high-quality, resilient tech names
- Big Tech’s strong balance sheets and earnings visibility provide defensive appeal
Some strategists argue the current setup makes Big Tech “irresistible” at current levels.
Investor Takeaways
- The negative correlation between Big Tech and the broader market signals a potential leadership shift.
- Recent underperformance has made valuations more attractive.
- Big Tech still delivers superior earnings growth, supporting long-term investment appeal.
- Risks remain around AI spending and cash flow pressures, especially for hyperscalers.
- A volatile macro backdrop may favour rotation back into quality tech leaders.
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