Written by Emily Anderson.
The Nasdaq 100 Index has faced a brutal reality check, with Big Tech stocks plummeting into correction territory. Over the span of just three weeks, the index lost more than $2 trillion in value. This sharp decline has left traders reeling as they unwind bets that had been consistently profitable for over a year.
The index dropped by 2.4% on Friday, crossing the 10% loss threshold from its peak on July 10, which defines a correction. It closed at its lowest since mid-May, though it remains nearly 10% up for the year. The sell-off has been particularly severe for tech giants like Nvidia and Tesla, both of which have fallen over 20% from recent highs, marking bear-market territory. Meanwhile, Microsoft and Amazon have each seen more than a 10% drop. Despite these losses, except for Tesla, most major tech stocks are still up for the year.
“This is an amazing about-face, like we’ve crashed into a brick wall,” said Bill Stone, chief investment officer at Glenview Trust Co. “We had a heck of a straight line up, and those don’t last forever, especially since expectations got so high. You clearly can’t just own tech; you need some exposure to the more defensive areas.”
Market Reactions and Predictions
Amazon and Intel have been among the biggest losers. Amazon fell 8.8% on Friday due to heavy AI spending plans, while Intel dropped a staggering 26% on a grim forecast, its worst one-day percentage decline since at least 1982, according to Bloomberg data.
Warnings about overvalued tech stocks and overstated AI-driven gains have been prevalent throughout the year. With some high-profile earnings disappointments, investors are now taking heed, pocketing gains, and shifting focus to previous laggards like utilities. These have led the market in the past two sessions, especially as Treasury yields fell with traders betting on the Federal Reserve cutting interest rates at its next meeting in September.
The Cboe NDX Volatility Index, which measures the 30-day implied swings in the Nasdaq 100, briefly spiked above 28, its highest since March 2023. Volatility indexes for Apple and Amazon have also surged recently. The Cboe Volatility Index, or VIX, has reached its highest level in more than a year.
The Broader Implications
The rotation away from tech began in earnest after June’s inflation data showed cooling prices, leading to bets that the Fed is ready to cut rates. Initially, small-cap stocks benefited, with the Russell 2000 rising nearly 4% since early July, compared to the Nasdaq 100’s steady decline.
The so-called Magnificent Seven megacap tech companies had driven much of the S&P 500’s first-half gains, with the cap-weighted index outperforming its equal-weight counterpart by the widest margin since 1999. Valuations soared, with the S&P 500’s information technology index reaching its highest price-to-earnings ratio since 2002.
The tech sell-off gained momentum after Alphabet reported capital expenses $1 billion higher than estimates in its July 23 earnings report, mainly due to AI-related outlays. This was the final straw for investors wary of unchecked spending with only distant revenue prospects, prompting a rush for the exits. Microsoft joined Alphabet and Amazon in signaling heavy AI spending.
“I don’t think they’d be doing this kind of spending if demand wasn’t there, which bodes well for the long-term AI story,” said Stone, who added to his Microsoft position during the sell-off. “However, there are all kinds of questions about the timing of AI demand, AI spending, and this kind of selling are the bumps in the road that come with that kind of thing.”
Our Take
The recent sell-off in Big Tech is a glaring example of the volatility that comes with high expectations and inflated valuations. As investors reassess their positions, it’s clear that the market’s love affair with tech stocks is facing a severe test. This isn’t just bad news for the companies involved but for the broader market and economy. The reliance on a few tech giants to drive market gains is risky and unsustainable, and the recent correction highlights the need for a more balanced investment strategy.
As we move forward, it’s crucial for both investors and companies to temper their expectations and focus on sustainable growth. The tech sector’s recent downturn serves as a stark reminder that no stock, no matter how seemingly invincible, is immune to market forces.
