Tech stocks' decline erases over US$2tn, pushing Nasdaq 100 into correction as investors
The Nasdaq 100 Index has entered correction territory, shedding over US$2tn in value within just over three weeks due to a significant rotation away from Big Tech.
This plunge, driven by traders unwinding bets that had been lucrative for more than a year, was reported by BNN Bloomberg.
On Friday, the Nasdaq 100 Index closed down 2.4 percent, resulting in a loss of more than 10 percent since its July 10 record, thereby meeting the definition of a correction. Despite this drop to its lowest point since mid-May, the index is still up nearly 10 percent for the year.
Several megacap stocks experienced heavy selling, with Nvidia Corp. and Tesla Inc. both falling over 20 percent from recent highs, placing them in bear-market territory. Microsoft Corp. and Amazon.com Inc. each lost more than 10 percent.
However, major Big Tech stocks, excluding Tesla, remain higher for the year.
Bill Stone, chief investment officer at Glenview Trust Co., described the situation, “This is an amazing about-face, like we’ve crashed into a brick wall. 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.”
Among the biggest decliners were Amazon and Intel Corp. Amazon dropped 8.8 percent on Friday due to heavy AI spending plans, while Intel plummeted 26 percent on a bleak forecast, marking its largest one-day percentage drop since at least 1982, according to Bloomberg data.
Warnings about tech stocks being overpriced, AI-fueled gains being overblown, and the market's concentration have been evident throughout the year.
High-profile earnings disappointments have confirmed these concerns, prompting investors to pocket gains and shift investments into previous laggards like utilities.
Utilities have led the market over the past two sessions, with Treasury yields falling as traders anticipate the Federal Reserve cutting interest rates at its September meeting.
The Cboe NDX Volatility Index, which measures 30-day implied swings in the Nasdaq 100 Index, briefly spiked above 28, its highest level since March 2023. Volatility indexes for Apple and Amazon have also increased recently. The Cboe Volatility Index (VIX) has reached its highest point in over a year.
The tech sector rotation began after a June inflation report showed cooling prices, leading to speculation that the Fed would cut rates. Small-capitalization stocks initially benefited, with the Russell 2000 rising nearly 4 percent since early July, in contrast to the steady decline of the Nasdaq 100.
The ‘Magnificent Seven’ megacap tech companies significantly contributed to the S&P 500's first-half gains, with the cap-weighted index outperforming its equal-weight counterpart by the largest margin since 1999.
The S&P 500's information technology index reached its highest price-to-earnings ratio since 2002.
The tech downturn intensified after Alphabet Inc. reported capital expenses exceeding estimates by $1bn in its July 23 earnings report, mainly due to artificial intelligence spending. This prompted investors, wary of unchecked spending with only distant revenue prospects, to exit.
Microsoft joined Alphabet and Amazon in signaling heavy AI spending.
Stone commented, “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. 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.”
Stone had been increasing his Microsoft holdings during the selloff.
Despite the turmoil, there were some positive notes. Apple Inc. rose 0.7 percent on Friday following a favourable earnings report, and Meta Platforms Inc. saw gains earlier in the week on its earnings results.
