The tech crash isn’t over yet.
The warning from strategists comes as investors sell off big tech stocks and pour into previously out-of-favor areas of the market.The Nasdaq 100 Index ended the weekend down 2.7%, its third straight weekly decline and the technology sector’s biggest one-day percentage drop since October 2022.
The culprits are bets on the Fed cutting interest rates, Tesla’s (TSLA) sluggish earnings, and concerns about Alphabet’s (GOOG, GOOGL) increased AI spending.
“Valuations are perfectly priced both from an earnings perspective and an interest rate perspective, and ultimately we’ll see some sort of valuation correction,” Megan Hornman, chief investment officer at Verdence Capital Advisors, told me.
Horneman warned that AI deals are “hitting a wall,” adding that the exit of big tech companies is just the beginning of a “valuation correction.”
The ongoing big shift has propelled small-cap stocks to the top of investors’ buy lists, with the Russell 2000 (RUT) posting its third consecutive weekly gain, its best three-week period since 2022. According to data compiled by Bespoke, the difference in outperformance between the Russell 2000 and the Nasdaq 100 (NDX) over the past 12 trading days has been in favor of the small-cap index, making it the second-most extreme in the history of both indexes.
“The fact that Magnitude 7 is priced at such a high multiple means it’s pricing in earnings growth, and if that doesn’t happen then the valuation comes into question,” Brad McMillan of Commonwealth Financial Network explained to me.
“There is a risk that further pressure will come,” Mr McMillan said.
Goldman Sachs said the risk of slowing profit growth and rising spending on AI could signal a “dramatic reversal in momentum” ahead unless big tech companies raise their future revenue guidance.
Goldman Sachs’ David Kostin wrote in a client note that investors are beginning to worry about possible “overinvestment” in AI without proven timely returns, noting that Amazon (AMZN), Meta (META), Microsoft (MSFT), and Alphabet are driving much of the spending.
“Consensus estimates for hyperscaler capital expenditures and research and development spending in 2024 and 2025 have increased by $65 billion compared to estimates at the beginning of the year. However, analysts have only increased their revenue forecasts for 2025 and 2026 by $36 billion — a gap of nearly $30 billion,” Kostin wrote.
“These companies have significantly increased their planned spending on AI initiatives over the past six months, but it’s not clear when the payback will be — it could be 2027, 2028, 2029, or never,” he added.
The story continues
As our markets reporter Josh Schafer pointed out, two charts from Yahoo Finance’s Chartbook suggest more selling is on the way: According to analysis by Truist’s Keith Learner, the S&P 500 is expected to correct about 9% on average in the second half of the year after rising more than 10% in the first six months.
Meanwhile, Brian Belski, chief investment officer at BMO Capital Markets, looked at historical performance and found that stocks often fall an average of 9.4% in the second year of cyclical bull markets, such as the one that began in October 2022.
“This market is pretty overheated because everyone is looking at the big tech stocks and chasing the market,” Belski told me. “It’s really hard to be overweight on Apple or Nvidia… especially given how much they’ve risen.”
Earnings results from Meta, Amazon, Apple and Microsoft due out this week will no doubt be key gauges, as disappointments like those seen from Alphabet and Tesla could deal yet another major blow to the tech market.
Shauna Smith is an anchor for Yahoo Finance. Follow Smith on Twitter. translatorHave a tip on a deal, merger, activist situation or anything else? Email me at seanasmith@yahooinc.com.
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