On Tuesday, the US 10-year yield hit its highest level since January 2025, while the German 10-year Bund yield rose to its highest level since 2011. Equities on both sides of the Atlantic pulled back, with the S&P 500 and Stoxx 600 declining around 0.70%. The Nasdaq 100 led losses with a 1.68% selloff, while VanEck’s semiconductor ETF fell 4%. The Nikkei followed its Western peers lower, while the Korean Kospi index is down by more than 5% at the time of writing.

Moving forward, the downside correction in equities will likely deepen. Energy companies’ stocks remain a good hedge against the Middle East flare-up and energy-price-led inflation risks. The cyclical and energy-dependent European indices are, in theory, more sensitive to energy prices than their technology-heavy US peers. But an interesting question is whether the tech-heavy US indices will outperform during this new wave of geopolitical jitters and rising energy prices.

Judging by yesterday’s activity, this is not yet the case: the Nasdaq 100 fell significantly more than other major peers. What if the rise in oil prices persists and/or accelerates? Could investors move funds toward technology companies as the did in the early weeks of the Iran war?

Tech: how vulnerable?

It’s important to note that Big Tech companies are increasingly vulnerable to the global macro picture – more specifically, to interest rates. The latest quarterly reports showed that Big Tech’s free cash flow levels evaporated due to massive AI spending in Q2, and the latter leaves these companies more sensitive to borrowing costs as they continue spending on AI infrastructure.

This is not a new trend, but the latest Q2 reports confirmed it, and the latter could – maybe – limit appetite when yields go up, as is the case today. Indeed, Big Tech corporate bond yields move broadly in parallel with US long-term yields: when the 10-year goes up, corporate bond yields with similar maturities tend to follow. And the latter puts downward pressure on valuations while potentially increasing financing costs at a time when these stocks are priced to perfection.

Now, perfection doesn’t necessarily mean bubble, but it means expensive. At the index level, as you would expect, US equities’ 12-month forward P/E ratios relative to the past two decades stand near the top of their historical ranges – and US equities including and excluding Big Tech occupy the top two positions in terms of how expensive these companies’ stock prices are, followed by Japan and Europe.

Much further down the line, you find EM stocks. The latter’s 12-month P/E ratio stands below its historical range, at only around 10.5x, versus the tech-heavy US stocks’ 21.2x ratio, according to a recent chart by Goldman Sachs.

So, yes, it makes sense to diversify geographically, as high valuations make major US equities’ earnings yields less attractive relative to cheaper markets, where lower valuations leave more room for multiple expansion and potentially offer a better risk-reward profile. Moreover, US equities become less attractive compared with lower-risk alternatives as bond yields rise!

The Nasdaq 100, for example, has a forward P/E ratio of around 25x, giving it an earnings yield of around 3.9% – that’s well below the roughly 4.7% you can get by allocating capital to the US 10-year Treasury, or around 5.30% you can get from the US 30-year bond. Just saying.

That’s one of the reasons why I don’t think the major US indices may not have significant upside potential if US longer-term yields keep climbing. The disrupted traffic in the Strait of Hormuz may be underpriced via crude oil prices, but the US 10-year yield’s correlation with the number of ships crossing the Strait is remarkable.

Of course, transit data doesn’t capture the entire situation – as some ships reportedly go dark to transit through the Strait – yet a prolonged war means pressure on inflation via energy prices at a time when the Fed’s policy outlook and its reaction function to inflation are no longer straightforward, putting upward pressure on longer-maturity US yields. Then, more military spending to keep the war going adds another layer.

Something must give: either yields will come lower – if Middle East tensions ease, for example – or stock valuations will readjust. But the global cross-asset picture today makes little sense for allocating more to US equities.

What about other markets?

Earlier this week, I mentioned that Chinese yields are diverging from their Western and Asian peers. China’s struggle with the property crisis, weak consumer metrics and fierce price wars are keeping the economy on the verge of deflation, pulling yields lower. Lower yields are supportive of Chinese equities – with appetite also boosted by excitement around AI-related names, even as these players grapple with higher AI costs on top of destructive price wars and fierce competition among domestic players.

Shanghai’s tech-heavy STAR 50 index – heavy in Chinese chips and AI hardware – has rallied more than 80% since the beginning of the year and is up by more than 30% after a sharp summer correction. But the STAR 50’s P/E ratio stands near 150x, implying an earnings yield of less than 1%, making it not cheap at all compared with Western peers, and not particularly appealing given that the Chinese 10-year yield stands at 1.68%!

In comparison, the HSI index – heavy in Chinese Big Tech, including the likes of Alibaba, Baidu and Tencent – has a P/E ratio of around 12x and an earnings yield of roughly 8%.

The Kospi, on the other hand, has a forward P/E ratio of around 7–8x, making it cheaper, though not less risky, for investors looking for discounted valuations around the globe. Its forward earnings yield stands around 12–13%, well above South Korea’s 10-year government bond yield of near 4.40% today.

Elsewhere, the Japanese TOPIX has a 5.9% earnings yield versus around 2.90% for the 10-year JGB yield, whereas the TAIEX earnings yield stands at roughly 3.5%, versus around 1.9% for Taiwan’s 10-year government bond, implying an equity yield premium of about 1.6 percentage points.

What is clear is that high volatility across technology valuations and leveraged positions makes the risks two-sided wherever you go, and whatever price you pay. But looking at valuations and earnings yields, and comparing them with lower-risk government bond yields, Asian equity markets – particularly those with significant technology exposure outside mainland China – offer better value than their expensive US for investors ready to stomach high volatility.