Stocks are back in the red Wednesday, with technology once again pacing the declines, as investors examine their holdings in the market’s most important sector heading into the final weeks of the year.
The PHLX Semiconductor index, the market’s chip sector benchmark, lost around $500 billion in value on Tuesday, while extending its one-week slump to around 5% amid a broader pullback in megacap tech stocks.
The absence of a single catalyst for the slump, however, has investors questioning the fate of the current tech-led rally, which has lifted the S&P 500 more than 35% from its early April lows and helped the benchmark notch 36 all-time highs since the start of the year.
Comments from Wall Street CEOs reflecting concerns over tech valuations, which sit firmly north of their five-year averages, were tied to Tuesday’s selloff, as was a Securities and Exchange Commission filing that unveiled bets against two highflying AI stocks—Palantir and Nvidia—by famed investor Michael Burry.
Tech’s overwhelming dominance of the S&P 500, where the top 10 stocks in the market comprise around 40% of its market value, and crucially a third of its collective earnings, exaggerates the ongoing pullback. But it’s also likely to support markets into an end of year run if the current debate over tech valuations delivers a bullish verdict.
Robert Edwards, chief investment officer at Edwards Asset Management in Naples, Fla., sees the current pullback as “a brief breather” that will be shortly reversed by a combination of “strong earnings and a Federal Reserve in full-on dove mode.”
“Along with trillions of dollars in cash on the sidelines, this suggests that after this breather passes we’re likely to set record highs by New Year’s Eve,” he added.
James Reilly, senior markets economist at Capital Economics, thinks the market’s view on tech, and the AI investment narrative in particular, will prove far more important than Federal Reserve rate cuts in terms of dictating S&P 500 performance over the coming year.
“We doubt non-tech firms would rescue the market if AI demand were to falter,” he said in a Wednesday note. “Instead, we think the prospect of the S&P 500 rising towards our end-2026 forecast of 8,000 rests largely on demand for AI continuing to grow.”
One of the best guideposts for that view is likely to come from Nvidia, the clear market leader in AI chipmaking, when it posts fiscal third-quarter earnings on Nov. 19.
Last week’s quarterly updates from megacap peers such as Microsoft, Amazon, Facebook parent Meta Platforms and Google parent Alphabet all included big increases in AI spending plans for the coming year, much of which will be devoted to purchasing Nvidia components.
In fact, Goldman Sachs data suggests AI spending from those four companies, as well as Oracle, will rise to past $550 billion next year and $640 billion in 2027.
Nvidia’s semiannual tech event last week in Washington also included a flurry of new deals and objectives that Gene Munster, managing partner at DeepWater Asset Management, thinks lifted the tech giant’s profit outlook by around 15% compared to Wall Street’s forecasts.
But it could be a long two weeks before Nvidia cements that assessment. And, in the meantime, tech stocks are likely to face extended selling pressure as the government shutdown prevents the Fed from examining the data needed to deliver a consistent message on rate cuts.
Investors are also likely to trim exposure from a sector that has delivered the lion’s share of their year-to-date gains.
But that may not spell the end of the current bull market, which many see as being driven by secular forces such as AI that are driving gains not only in stocks, but also in key commodities such as copper and certain areas of the private credit markets.
“This looks more like a healthy reset than a structural breakdown,” said Charu Chanana, Saxo Bank’s chief investment strategist. “But the next phase will depend on new catalysts such as a revival in AI spending, stabilizing yields, and a softer dollar.”
Write to Martin Baccardax at martin.baccardax@barrons.com
