THE violent rotation from Big Tech plunged the Nasdaq 100 Index into correction territory, wiping out more than $2 trillion in value in just over three weeks, as traders unwound bets that had been minting money for over a year.
The index was down 1.7% in early trading on Friday, taking its loss since a July 10 record past 10%, with Apple leading declines. If that holds through the end of trading, it will meet the definition of correction. The index remains up 10% for the year.
Several megacaps have seen concentrated selling, with both Nvidia and Tesla down more than 20% from recent highs, putting them in bear-market territory. Meanwhile, Microsoft, Apple and Amazon have each lost at least 6%. However, all remain higher for the year.
“This is an amazing about-face, like we’ve crashed into a brick wall,” said Bill Stone, the 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.”
Red flags have been waving for the better part of the year, whether it’s tech stocks are too expensive, AI-fuelled gains are overdone, or the market is too concentrated. With some high-profile earnings disappointments cementing those views, investors are now heeding those warnings, pocketing gains and plowing into previous laggards, like utilities, which have been leading the market over the past two sessions Treasury yields tumbled as traders bet 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 Index, briefly crossed 25, the level last seen in October 2023. Volatility indices for Apple and Amazon have also spiked of late. And the Cboe Volatility Index, or VIX, rose past the 20 threshold for the first time since October.
The rotation away from tech began in earnest after reading on June prices showed cooling inflation, stoking bets the Fed is ready to cut rates. The initial beneficiary was small-capitalisation stocks, with the Russell 2000 rising about 4.5% since then, compared with the Nasdaq 100’s 3.8% decline.
The so-called Magnificent Seven megacap tech companies accounted for much of the S&P 500’s 14% first-half advance, with the cap-weighted index beating its equal-weight cousin by the most since 1999. Valuations soared, with the S&P 500’s information technology index seeing its highest price-to-earnings ratio since 2002.
The tech rout picked up steam after Alphabet unveiled capital expenses that topped estimates by $1 billion in its July 23 earnings report, owing mostly to outlays for artificial intelligence. That was enough for investors, who have grown wary of seeing unbridled spending with only distant prospects for higher revenue, to head for the exit. Microsoft and Amazon also signalled heavy spending on AI.
“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 said he had been adding to his Microsoft position amid 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.”
BLOOMBERG