Why tech stocks have been falling
Strategists say the market was due for a reset as investors reevaluate risk.
Key takeaways
- Technology stocks are down 5.6% since their most recent peak, but they’re up 22.0% since the start of the year.
- The losses come amid mounting worries about the durability of the surge in AI stocks.
- With valuations stretched, strategists say investors are reevaluating their appetite for risk.
Are technology stocks finally taking a breather? A blistering rally in the sector appears to have hit an air pocket, with the Morningstar US Technology Index falling 5.6% from its most recent peak on Oct. 29. These stocks lost 4.5% last week alone, making for the sector’s worst week since the tariff-induced selloff in April.
The broader market is down 2.2% since its peak at the end of October, while some of the highest-flying tech stocks tied to the artificial intelligence boom saw even bigger declines. For example, Nvidia NVDA fell 9.1% last week. The losses mounted even as firms like Meta Platforms META, Alphabet GOOGL/GOOG, and Amazon AMZN reported solid earnings for the third quarter. (Nvidia will release its results later this month.)
Those strong results were not enough to offset weeks of mounting worries that the sector won’t be able to live up to investors’ lofty expectations for future returns and earnings growth, especially as valuations continue to rise. “Once you see stocks sell off on strong earnings and guidance, like we’ve seen over the past week, it’s a clear sign that stocks are pricing in too much optimism,” says Jeff Buchbinder, chief equity strategist at LPL Financial.
Is tech ripe for a pullback?
The pause came on the heels of a months-long surge for AI-related names. Tech stocks regained some ground on Monday, and the sector is still up 22% so far this year and 64% since the most recent market bottom in April. Tech stocks have soared more than 180% since the end of the bear market in 2022.
In recent months, those gains have been accompanied by a growing chorus of worries about the AI trade. So-called “hyperscaler” firms like Alphabet, Microsoft MSFT, and Meta are committing billions to the AI buildout, but it’s not clear how all that investment will translate to profits for investors.
David Lefkowitz, head of US equities at UBS Global Wealth Management, says that while third-quarter earnings show “no signs of a mismatch between supply and demand” for AI infrastructure, it’s still too early to know how much will ultimately be invested, or what returns those investments will yield. “It takes a while for companies to adopt this technology,” he says.
Mark Hackett, chief market strategist at Nationwide, thinks that in the shorter term, the decline in tech last week suggest “increasing skepticism over the AI narrative, or concerns over valuations.” He sees this as a sign that perhaps paradoxically, investors have not become overly complacent about tech. Hackett points out that it’s not the first time the market has “take[n] a break to rest expectations and contemplate the forward outlook” after a strong earnings season.
Brad Conger, chief investment officer at Hirtle, Callaghan & Co., points out that the most speculative names in the market—including those tied to quantum computing, meme stocks, and cryptocurrency—had already faltered over the past month or two, while “core” technology stocks, like those included in the Nasdaq composite, continued to rise. “That’s what you would expect if the market’s risk appetite was being exhausted.” Conger says that last week, that weakness extended to core names like Nvidia, Oracle ORCL, and Meta.
The bottom line for investors
For Buchbinder of LPL Financial, last week’s selloff was not a sign of any fundamental deterioration in tech, but rather that valuations had grown too stretched. “AI still has great promise, but perhaps not as much as some of these frothy AI stocks have priced in,” he explains. Layoff announcements, the government shutdown, the Supreme Court tariff case, and other factors were “convenient excuses” for the selloff, but Buchbinder doesn’t believe they were the cause.
For the time being, Buchbinder says tech has more room to run, despite the risks that the massive investment in AI from mega-cap firms doesn’t pan out. He’s not planning to move to an underweight exposure to the sector. “If AI is going to disappoint, it’s going to take a while before the market gets enough evidence to definitively make that call,” he says. “In the meantime, as far as earnings go, the tech sector is the best game in town.”
Conger of Hirtle Callaghan will be watching for more weakness in speculative stocks: “If the fringes continue to hemorrhage while the market leaders consolidate, it would suggest further pain ahead.”
