News
Why the tech stock sell-off isn’t over yet: Wall Street strategists
O technological defeat is far from over.
That’s the warning from top strategists as investors dump big tech stocks in favor of previously unloved areas of the market. The Nasdaq 100 closed the week down 2.7%, marking its third straight week of declines, with the technology sector suffering its biggest single-day percentage drop since October 2022.
The culprits: betting on Fed Rate Cutsfrom Tesla (TSLA) mediocre earningsand fears about the alphabet (GOOG, GOOGL) AI Spending Ramp.
“Valuations were priced perfectly from an earnings and interest rate perspective, so eventually we would see some sort of valuation correction,” Megan Horneman, chief investment officer at Verdence Capital Advisors, told me.
Horneman, who warned that the AI trade is “hitting a wall,” added that the rotation out of big tech companies is just the beginning of a “valuation correction.”
The significant shift underway has pushed small caps to the top of investors’ buy lists. The Russell 2000 (ROUTINE) posted weekly gains for the third straight week, marking its best three-week stretch since 2022. Data compiled by Bespoke found that outperformance was spread across the Russell 2000 and the Nasdaq 100 (NDX) over the past 12 trading days in favor of the small-cap index is the second most extreme in the history of the two indices.
“With multiples as high as the Magnificent 7 [stocks]they are building earnings growth. And if you don’t see that earnings growth, that means valuations are questioned,” Commonwealth Financial Network’s Brad McMillan explained to me.
“There is a threat of more pressure ahead,” McMillan said.
And that risk of slower earnings growth, coupled with increased spending on AI, could signal that the “epic reversal in momentum” will persist unless big tech companies raise forward revenue guidance, according to Goldman Sachs.
In a note to clients, Goldman Sachs’ David Kostin wrote that investors are starting to worry about the prospect of “overinvestment” in AI without proven returns in a timely manner, noting that Amazon (AMZN), Goal (GOAL), Microsoft (MSFT) and Alphabet are driving most of the spending.
“Consensus estimates of 2024 and 2025 capex and R&D spending by hyperscalers have increased by $65 billion compared to expectations at the start of the year. However, analysts have increased their 2025 and 2026 sales forecasts by only $36 billion — a gap of nearly $30 billion,” Kostin wrote.
“Over the past six months, these companies have dramatically increased their planned spending on AI initiatives, but it’s unclear when the payback will come — in 2027, 2028, 2029, or perhaps never,” he added.
The story continues
As our markets reporter Josh Schafer notedtwo graphs in Yahoo Finance Chartbook suggest more selling ahead. Analysis by Keith Lerner of Truist found that the S&P 500 sees an average correction of about 9% in the second half of the year, after the index rose more than 10% in the first six months.
Meanwhile, analysis of past performance by BMO Capital Markets chief investment officer Brian Belski found that stocks typically fall an average of 9.4% in the second year of a cyclical bull market, which began in October 2022.
“This market has become quite choppy with everyone looking at large-cap tech stocks and chasing the market,” Belski told me. “It’s really hard to be overweight Apple or overweight Nvidia… especially considering how much they’ve recovered.”
It’s safe to say that next week’s earnings results from Meta, Amazon, Apple and Microsoft will be a crucial measure. Any kind of disappointment, similar to what we saw from Alphabet and Tesla, could trigger more carnage for the tech market.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations or anything else? Email me at seanasmith@yahooinc.com.
Three times a week, executive editor of Yahoo Finance Brian Sozzi fields conversations and chats full of insights with the biggest names in the business world in your Initial bid podcast. Find more episodes on our video center. Watch on your preferred streaming service. Or listen and subscribe at Apple Podcasts, Spotifyor wherever you find your favorite podcasts.
Below Initial bid episode, Morgan Stanley’s influential chief investment officer Mike Wilson lays out his case for a next 10% correction in the markets.
This embedded content is not available in your region.
Click here for the latest technology news that will impact the stock market
Read the latest financial and business news from Yahoo Finance