(Bloomberg) -- The violent rotation from Big Tech plunged the Nasdaq 100 Index into correction territory, wiping out more than US$2 trillion in value in just over three weeks, as traders unwound bets that had been minting money for over a year.
The index closed down 2.4% on Friday, taking its loss since a July 10 record to more than 10%, passing the threshold that meets the definition of correction. The index closed at its lowest since mid-May on Friday, but remains up nearly 10% for the year.
Several megacaps have seen concentrated selling, with both Nvidia Corp. and Tesla Inc. down more than 20% from recent highs, putting them in bear-market territory. Meanwhile Microsoft Corp. and Amazon.com Inc. have each lost more than 10%. However, with the exception of Tesla, major big tech stocks remain higher for the year.
“This is an amazing about-face, like we’ve crashed into a brick wall,” said Bill Stone, 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.”
Amazon and Intel Corp. were among the biggest decliners. Amazon fell 8.8% on Friday on heavy AI spending plans, while Intel plummeted 26% on a grim forecast, its biggest one-day percentage drop since at least 1982, according to data compiled by Bloomberg.
Red flags have been waving for the better part of the year, whether it is that tech stocks are too expensive, AI-fueled 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 tumbling 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 spiked above 28, its highest since March 2023. Volatility indexes for Apple and Amazon have also jumped of late. And the Cboe Volatility Index, or VIX, is also at its highest in more than a year.
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-capitalization stocks, with the Russell 2000 rising nearly 4% since early July, compared with the Nasdaq 100’s steady decline.
The so-called Magnificent Seven megacap tech companies accounted for much of the S&P 500’s 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 Inc. 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 joined Alphabet and Amazon with a signal of 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 selloff. “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.”
There have been some bright spots. Apple Inc. rose 0.7% on Friday, following a positive earnings report, and Meta Platforms Inc. rose earlier this week on its own results.
©2024 Bloomberg L.P.
