of The defeat of technology It’s not over yet.
That’s what top strategists are warning as investors sell off big tech stocks and pour into previously out-of-favor areas of the market.The Nasdaq 100 Index ended the week down 2.7%, its third straight weekly decline. The tech industry is in trouble It was the biggest one-day drop since October 2022.
Culprit: Gambling Federal Reserve Rate CutsTesla’s (TSLA) Revenues are sluggishand the alphabet (Google, Google) Increased spending on AI.
“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 big changes underway have propelled small-cap stocks to the top of investors’ buying lists.root) recorded its third straight weekly gain, its best three-week winning streak since 2022. The Russell 2000 and Nasdaq 100 (Nedix) has risen in favor of the small-cap index over the past 12 trading days, the second most extreme in the history of the two indexes.
“The Magnificent 7 is a high multiple, so [stocks]”They’re building up earnings growth, and if they don’t see that growth, that means valuations come into question,” said John F. Kennedy, president of Commonwealth Financial Network. Brad McMillan 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 said in a client note that investors are beginning to worry about “overinvesting” in AI without a proven timely return, and cited Amazon.Amazon), Meta (Meta), Microsoft (MSFT), and Alphabet are driving the bulk 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.
As a market reporter Josh Schafer said:two charts Yahoo Finance Chart Book More selling is on the way: After gaining more than 10% in the first six months of the year, the S&P 500 is expected to correct about 9% on average in the second half of the year, according to analysis by Truist’s Keith Learner.
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 has become pretty overheated with everyone looking at the big tech stocks and chasing the market.” Belski told me“It’s really hard to overbuy Apple or Nvidia, especially given how high their stock prices have 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.
Sheena Smith Anchor for Yahoo Finance. Follow Smith on Twitter translatorHave a tip on a deal, merger, activist situation or anything else? Email me at [email protected].
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