Bank Hapoalim Review Highlights Tech Resilience Amid Rising Bond Yields

Global capital markets continue to navigate disparities between technology sector performance and weakness in other market segments. Massive investments in artificial intelligence infrastructure provide a tailwind for the sector, though rising bond yields increase pressure on stock and debt markets. In a capital market review published by Bank Hapoalim, bank economists present a mixed picture and emphasize the need for selective investment based on business performance and company valuations.

On the Tel Aviv Stock Exchange, the shortened trading week ended in the red: the TA-35 index fell by approximately 0.6%, the TA-125 lost about 0.7%, and the TA-90 dropped by roughly 1.1%. Technology stocks, including semiconductor firms, outperformed amid global industry developments and ongoing investments in AI infrastructure. Conversely, real estate, energy infrastructure, and insurance sectors declined during the final trading day, while the banking index rose.

The review notes that the yield on 10-year US Treasury bonds, which reached approximately 5.3% in early October, weighs on equity valuations and financing conditions in Israel as well. Highly leveraged companies, particularly those needing to refinance debt in the near term, face rising interest expenses. Consequently, examining a company's revenue growth rate is insufficient; the impact of financing expenses on earnings and cash flow must also be factored in.

In global markets, technology stocks stood out. The Nasdaq index rose by about 1.9% in September, while the SOX semiconductor index surged by roughly 11%. In contrast, the S&P 500 fell by about 0.5%, the Dow Jones lost approximately 4.3%, and the Russell 2000 index weakened by about 5.3%. These divergences demonstrate that market gains remain concentrated primarily in large-cap tech companies rather than spreading evenly across all equities.

Ahead of third-quarter earnings reports, the review indicates a preference for semiconductor and hardware firms, alongside selective exposure to software and cybersecurity companies. According to the forecast, capital expenditures by cloud giants are expected to grow by about 50% in 2027, following a projected doubling in 2026. These investments may support demand throughout the supply chain, though high expectations could increase volatility if companies fail to meet forecasts.

The cybersecurity sector also registers positive demand trends, partly due to the need to protect corporate infrastructure and applications integrated with artificial intelligence. However, the review warns that following sharp gains in sector equities, elevated valuations leave little room for disappointment. In the software sector, conversely, potential exists for revenue expansion from AI as technology adoption transitions from experimental phases to practical workplace implementation.

In the US, only 29,000 jobs were added in September, compared to expectations of around 90,000, and the unemployment rate rose to 4.2% versus a forecasted 4.1%. These figures dampened expectations for an interest rate hike at the upcoming Federal Reserve meeting. Nevertheless, growth and consumption data continued to point to strong economic activity, and inflation concerns persisted.

In Europe, inflation climbed to 3.8% compared to 3.2% in August, heightening concerns over continued restrictive monetary policy. France stood out as a risk focal point amid high debt, a widening deficit, and political difficulties in advancing a 54 billion euro austerity plan. The yield on 10-year French government bonds reached approximately 4.86%, and the spread over equivalent German bunds widened to its highest level since the European debt crisis.

In Israel, the 12-month inflation forecast stands at approximately 2%, and the interest rate is expected to remain at 3.25% in the near term. Further moderation in inflation could allow for a rate cut down the road, though long-term interest rates are expected to remain influenced by international market developments.

Regarding local equities, the review recommends maintaining current exposure without blanket expansion at this stage. Within the domestic portfolio, priority is given to the TA-35 and TA-125 indices for diversification and liquidity, alongside selective stock and sector selection. In income-producing real estate, a selective positive preference remains, examining cash flows, leverage levels, and debt refinancing costs.

Global markets maintain a preference for the technology sector, alongside healthcare, aviation, defense, and energy industries. In the fixed-income sector, rising yields are beginning to create opportunities for long-term investors, although volatility remains high. The preference leans toward short-to-medium duration alongside high-grade government and corporate bonds, while exercising caution regarding speculative debt securities.