All good things must come to an end—even the tech rally that has propelled the market to break record after record this year.
No matter how diversified you think your portfolio may be, your gains over the past year are likely from a few key stocks known as the Magnificent 7. This small handful of big tech stocks rode AI hype all the way to the bank last year, with the group as a whole gaining 76% in 2023, far outpacing the S&P 500’s 23% gain over the same time period. In 2024, performance for these stocks has diverged, with Nvidia leading the pack and rising 145%, while Tesla is down about 1%.
But the tech rally took a turn for the worse this week. Shares of Nvidia, Apple, and Taiwan Semiconductor Manufacturing Company, the largest chipmaker by sales, tumbled on Wednesday, dragging the Nasdaq down 2.7% and the S&P 500 down 1.4% by the end of the day.
Investors were spooked after President Biden discussed trade restrictions on chipmakers. Given that presidential candidate Donald Trump holds the same position, these restrictive trade policies are likely to come into effect no matter who wins the White House this November. That’s bad news for chipmakers that not only sell in foreign markets but also depend on foreign suppliers to help build their products.
Because of how inflated AI-related stocks have become, investors were alarmed at even the slightest news of a downturn ahead and rushed to take profits. Nvidia fell 6.64% by the end of the day, while ASML plummeted 12.74% after news broke that Biden is considering using an esoteric and extremely stringent US law to impose export controls over its products.
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Meanwhile, shares of TSMC sank 7.92% today after Trump argued that Taiwan, which currently has a security guarantee from the US, should “pay for its own defense.” He also said that the country “stole our chip business” in an interview with Bloomberg published Tuesday.
The result: Investors are heading for the door as fast as they can—and as investors pile out of tech, they’re pushing small-caps higher. The Russell 2000 has gained about 8% over the past week as investors search for the next big thing—which might just be undervalued small-cap stocks.
The age old question: Is AI overhyped?
Just because AI stocks have had a legendary run doesn’t necessarily mean that they’re currently overvalued.
For example, the vast majority of analysts still have “buy” ratings on Nvidia, Apple, and TSMC, according to a WSJ compilation of analyst ratings. Nothing is fundamentally wrong with these stocks—at least not yet. This earnings season should reveal just how much more fuel there is to the AI fire, and if management at AI-related companies even hints at a slowdown in sales ahead, expect the selloff to hit overdrive.
But this could be a sign that there’s value elsewhere (literally). A number of investment firms recommended other corners of the market, including small caps and utilities, as a way to balance your portfolio from the rise and fall of AI.—LB