The Nasdaq and S&P 500 have suffered their worst single-day decline since 2022 – led by underwhelming financial results from Tesla and Alphabet, the owner of Google.
The sell-off points to wider concerns surrounding the high valuations of a handful of tech giants, and how vulnerable the wider US market is to their fate.
The so-called “magnificent seven” of high-performing tech stocks are Microsoft, Amazon, Google Parent – Alphabet – Tesla, Facebook (aka Meta), Nvidia, and Apple.
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Each lost value during Wednesday’s trading.
Collectively, they had their worst day since Meta went public over a decade ago.
The chipmaker Nvidia, which is among the biggest benefactors of the AI boom, proved the biggest drag on the S&P 500, with its stocks struggling to recover amid fears of escalating trade tensions between the US with China and Taiwan, where most of the world’s microchips are made.
While the US presidential race and projections for inflation and interest rates in the country weigh heavily on stocks, Silicon Valley in particular is under pressure to show returns from its multibillion-dollar investments into developing artificial intelligence technology.
Alphabet shares fell 5% even though Google’s parent company delivered better-than-expected profits, because analysts feared that rising AI investments and other spending could eat into earnings.
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Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said: “This harsh market reaction to Google earnings – which were a beat by the way – hints that we are coming to a point in the AI rally where investors are increasingly impatient to see their massive spending turn into profits, while the big spenders continue to say that they should spend more before seeing the benefits.
She added: “From a broader perspective, the fact that the Federal Reserve [rate cut] expectations are rising is not positive for the Big Tech stocks as these behemoths were seen as a safe place to hide when the rates were high, and could see their advance wane due to a sector rotation. Therefore, a tech selloff combined with lower interest rates, is expected to boost appetite for [companies with smaller valuations].”
The size of the tech giants has reached a point where not everyone is buying into the idea that their growth is sustainable.
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Rises in valuations in recent years have been focused on a small number of companies whose performance is interconnected, so some analysts have advised investors to spread out the risk and invest across a broader range of stocks.
Citigroup analysts recently advised investors to take their profits from high-flying AI stocks and “re-balance toward a broader array of AI stocks across the value chain”.
All eyes are now on the remaining big tech companies Meta, Amazon and Apple who will be expected to reassure investors when they report their earnings next week.