(Bloomberg) — Stocks came under pressure as a trio of tech heavyweights slid, with traders wading through mixed economic data in the run-up to Jerome Powell’s testimony to Congress.
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Equities lost traction after a rally that has spurred concern about sky-high valuations — especially in megacaps, leaving the group vulnerable to big moves in the face of bad news. Apple Inc.’s iPhone woes in China deepened, while Advanced Micro Devices Inc. hit a US roadblock in selling an artificial-intelligence chip to the Asian nation. And Tesla Inc. extended its rout as China shipments slumped.
Bullish positioning in US technology stocks is at the highest in three years — raising the risk of a pullback, according to Citigroup Inc.’s Chris Montagu. Long positioning in Nasdaq 100 futures is “extremely extended,” he said.
“Trees don’t grow to the sky,” said Kenny Polcari at SlateStone Wealth. “What is starting to concern some investors is whether or not some of these tech companies that have gotten stretched can in fact live up to the ‘lofty valuations’ that investors have placed on them.”
Wall Street also weighed data showing the US service sector cooled — even as orders and business activity picked up. Caution prevailed, with Powell heading to Capitol Hill for his semiannual testimony before Congress, where the Federal Reserve chief is expected to reiterate the lack of urgency to cut rates.
The S&P 500 fell below 5,100, while the Nasdaq 100 dropped about 2%. All megacaps fell, with Tesla extending a two-day slide to 11% and Apple dropping to the lowest since October. Treasury 10-year yields slid eight basis points to 4.13%. In the latest sign of market exuberance, Bitcoin hit a record — before erasing gains. Gold also touched an all-time high.
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The “Magnificent Seven” — comprising Apple, Microsoft Corp., Nvidia Inc., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc. and Tesla — have powered the S&P 500 to all-time peaks this year, partly fueled by the AI frenzy.
The rally has left strategists scrambling to lift their 2024 targets — while raising questions on whether tech is seeing a boom or a bubble.
To JPMorgan Chase & Co.’s Marko Kolanovic, the dramatic rally in US equities and Bitcoin signals accumulating froth — conditions that typically precede a bubble when asset prices rise at an unsustainable pace. Meanwhile, David Kostin at Goldman Sachs Group Inc. is among those who argue big tech’s lofty valuations are supported by fundamentals.
The so-called Magnificent Seven saw its average earnings per share rise 55% in the fourth quarter compared to a year ago, according to data compiled by Bloomberg. Most of that group helped drive the Nasdaq 100 to its fourth consecutive monthly gain.
“The AI craze is a modern gold rush, and the tech ‘picks and shovels companies’ are seeing earnings explode as companies buy chips and cloud space to fuel the boom,” said Tom Essaye, founder of The Sevens Report. “But if AI doesn’t result in increased profitability for the rest of the S&P 500 over the coming years, then demand for AI chips will evaporate as will AI-related cloud demand.”
With generative AI set to be the growth theme of the decade, UBS’s Chief Investment Office continues to believe that US tech stocks should make up a substantial portion of investors’ equity allocations. However, the firm says investors with excessive exposure should consider broadening tech exposure to capture the next growth opportunities.
“While we see further room for the current tech rally to run, we think investors should review and optimize their exposure to technology to protect against potential declines and benefit from opportunities beyond big tech,” said Solita Marcelli at UBS Global Wealth Management.
“Although we see pockets of speculation and the tech sector could be due for a breather, we don’t see a bubble,” said Keith Lerner at Truist Advisory Services. “Valuations are rich on most metrics, but with tech, comparative earnings momentum tends to be a more important near-term driver. And profit trends remain strong and are at new highs.”
The three-year outperformance of the tech sector to the S&P 500 is just above 30%, Lerner said. This is roughly in line with the 30-year average and far from the peak of just above 250% seen in March 2000, he added.
“Comparisons to the dot-com bubble should be expected given the concentration of gains in the tech sector and proliferation of excitement around a new technology,” said Ross Mayfield at Baird. “But from 1996 to 1999, the average three-year trailing return was 96%….
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