Stock markets had a brutal day on Wednesday, with the S&P 500 (SPX), the Nasdaq Composite (NDAQ), and Nasdaq-100 (NDX) registering their worst daily declines since the end of 2022. The rout was led by large-cap technology benchmark Nasdaq-100, which lost $1 trillion in market value in the sell-off.
However, other indexes haven’t fared much better as quarterly reports from Tesla (TSLA) and Alphabet (GOOGL) failed to impress, igniting risk-off sentiment across the stock markets. The results of these first two members of the Magnificent Seven pack to report this season led the group into the correction territory.
Technology stocks, specifically those that had led the AI rally in the past year and a half, have been on a rough patch in recent weeks, as investors began questioning whether their high valuations and heavy capital investments would be justified by material earnings growth. The prospects of an imminent Federal Reserve rate cut have led to attempts at a rotation from tech stocks to stocks in the sectors expected to profit the most from easier monetary policy. However, the immense importance of tech leaders in last year’s stock rally has rendered these attempts fruitless so far, with the blue-chip value-oriented Dow Jones Industrial Average (DJIA) falling along with its much more tech-exposed peers.
Until not long ago, tech stocks represented a “quality haven” along with the promise of AI riches. As such, the expectations for their earnings growth have reached arguably unrealistic levels, with their stocks priced for perfection. Amid these outstretched expectations, the slightest hint at a weakness in earnings reports could have triggered a sell-off – which it eventually did on Wednesday.
Now, even more hinges on the reports from the rest of the leader board, the Magnificent Seven, and other AI-related stocks, as investors increasingly focus on the return on AI investments. While many analysts argue that it is unrealistic to expect to see an immediate payoff from AI capital expenditure, investor anxiety makes stocks vulnerable to sharp sentiment fluctuations. Some market participants mention “AI fatigue” after investor exuberance around the revolutionary technology added $9 trillion to the S&P 500 market cap in the past year alone, giving way to bubble fears.
Still, most Wall Street strategists are holding on to their large-cap tech bets as they believe these behemoths represent the most attractive option in terms of earnings growth and fundamental quality. This optimism will be put to the test in the next weeks by the reports of Microsoft (MSFT), Meta Platforms (META), Apple (AAPL), Amazon (AMZN), and NVIDIA (NVDA).
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