A sharp decline in heavyweight stocks, which have driven markets higher this year, is underscoring Wall Street’s vulnerability to any weakness in Big Tech and raising concerns about potential turbulence for over-stretched stocks.
Disappointing quarterly reports from Tesla (NASDAQ) and Alphabet (NASDAQ) triggered a severe market selloff on Wednesday, with the tech-heavy Nasdaq Composite plummeting 3.6%—its worst day since October 2022. The benchmark S&P 500 fell 2.3%, as the earnings reports raised worries about upcoming results from other major tech firms.
“This was the hair trigger for people saying, ‘Wow, I’ve got way too much exposure to information technology and growthier type companies,'” said Thomas Martin, senior portfolio manager at GLOBALT, regarding Tesla’s results after the electric vehicle maker posted its lowest quarterly profit margin in five years. “The trade … is to get more diversified.”
The rout follows months of optimism about artificial intelligence technology that fueled a rally in massive technology and growth companies, including Nvidia (NASDAQ), Microsoft (NASDAQ), and Amazon (NASDAQ), pushing the S&P 500 to record highs this year.
The megacap stocks, known as the Magnificent Seven along with Meta Platforms (NASDAQ) and Apple (NASDAQ), have accounted for around a third of the S&P 500’s 14% gain in 2024, making their trajectories crucial to the broader market’s performance.
As share prices soared, concerns about companies’ stretched valuations grew, with comparisons to the dotcom bubble of more than two decades ago becoming more frequent. The S&P 500 is trading near 22 times expected earnings, its highest in over two years, and well above its 10-year average of 18, according to LSEG data.
Signs of nervousness around tech stocks began to appear in recent weeks as the blistering rally in many market leaders seemed to lose steam. One indicator was the rise in the Cboe Volatility Index, known as Wall Street’s fear gauge because it measures demand for portfolio protection. The index shot to its highest level in three months on Wednesday.
Hedge funds have been reducing their market exposure over the past two weeks, according to prime brokers at Goldman Sachs and Morgan Stanley, amid fears that gains from earlier this year could evaporate if sentiment around tech stocks changed.
Andrew Volz, chief operating officer at prime broker Clear Street, noted that hedge funds continued to deleverage their portfolios on Wednesday, selling long positions and covering bearish bets.
“There were definitely general liquidations of things like Nvidia, Tesla, all the big seven tech companies,” Volz said.
EARNINGS OPTIMISM OVER-DONE?
Despite the S&P 500 being just 4% below an all-time high hit earlier this month, some investors worry that Wall Street may have become too optimistic about earnings growth, leaving stocks vulnerable if companies fail to meet expectations in the coming months.
This was evident on Wednesday when Alphabet’s shares fell more than 5%. While the company reported better-than-expected revenues, investors were wary that rising investments in AI infrastructure would squeeze margins and YouTube faced tough competition for ad dollars.
“We set the bar too high on earnings,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “Even Alphabet’s earnings beat, but the market obviously wasn’t impressed and they didn’t beat by enough.”
Many other Magnificent Seven stocks experienced sharp declines on Wednesday. Tesla shares fell more than 12%, marking their worst daily drop since 2020, while Nvidia lost 6.8%. Microsoft shares fell 3.6%, and Apple lost 2.9%.
Wednesday’s selloff is likely to leave investors on edge in the coming weeks as more tech earnings reports come in. Meta, Microsoft, and Apple are all scheduled to report next week, potentially increasing volatility if any of them disappoint or easing investor fears if the results are strong.
“We’re in a little bit of a pullback. But to me, it’s really just a short-term thing,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York. “If we see some good numbers in the coming days, it could reverse just as quickly.”
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