Making sense of market moves
Stay up to date on the latest market news with daily analysis of the investing landscape, served up Brew-style.
What goes up must come down.
Turns out that applies to the tech stocks that pushed every major equity index to an all-time high this year, and now are leading the way down as the market sells off this week.
Tesla and Alphabet reported disappointing earnings after the bell on Tuesday, spurring a selloff across the market on Wednesday that saw both the Nasdaq and S&P 500 suffer their worst day of trading since 2022. The pain continued on Thursday as a major tech selloff gained steam—according to Semafor, tech stocks lost $1.2 trillion in market value in just the last 48 hours.
Nvidia is down 6.65% in the previous 5 trading sessions, while Alphabet has fallen 6.14%, and Tesla dropped 11.07%.
What the heck is happening?
The tech selloff has been driven by a combination of faltering faith in AI returns, along with shifting macroeconomic conditions that have made other corners of the market suddenly look more appealing.
After new data earlier this month showed that inflation was decelerating, analysts and investors are growing more confident that the Federal Reserve will finally cut interest rates in September. The optimism about rate cuts has driven investors to other parts of the market beyond tech that could get a boost, particularly small caps.
Tech stocks have also risen so high this year that their valuations are starting to look stretched, leading investors to take profits and search for value elsewhere. Plus, earnings have been a referendum on whether or not AI companies can actually monetize artificial intelligence after making insanely large bets on the nascent technology—suddenly investors are worried tech companies aren’t going to get enough bang for their buck.
The good news
Tech comprises such a large part of the S&P 500 that its selloff is driving the entire index down—but under the surface, other sectors are actually faring pretty well.
Deutsche Bank’s Jim Reid pointed out that while investors have rotated out of tech since July 11, sectors like utilities and healthcare are up over the same period.
“Even a small rotation out of tech could mean a big rotation into other sectors,” he wrote.
Investors who are bullish on AI argue that this selloff is a breather, not a break, on AI returns. “We believe this tech sell-off will be short lived as the Street better digests results and commentary from the broader tech sector over the coming weeks during earnings season,” wrote Wedbush analyst Dan Ives. “This is the start....not the end of this tech bull run in our view fueled by this AI tidal wave of spending on the doorstep.”
The takeaway from all this volatility is as old as time: stay diversified.—LB