Tech stocks, once the darlings of the stock market, are showing signs of vulnerability as investors react to recent reports. On Wednesday, the Nasdaq Composite fell by 1.8%, more than the 1.2% drop in the S&P 500. This decline follows reports from two of the so-called “Magnificent Seven” tech giants who have been driving the market’s gains in recent times.
On Tuesday evening, Microsoft provided positive guidance, and Google’s parent company, Alphabet, reported better-than-expected earnings. However, both stocks experienced a tumble on Wednesday. Google’s miss in advertising revenue had a negative impact on social media stocks, while even Microsoft’s impressive quarter failed to meet high expectations.
This trend is not limited to Microsoft and Google. Tesla, another member of the Magnificent Seven, also disappointed with what Wedbush described as a “train wreck” of a quarter last week.
The lackluster performance of the tech sector can be partly attributed to how high it has soared in recent times. Prior to Wednesday’s drop, the Nasdaq had already risen by 3.3% in January, adding to its remarkable 44% rally in 2023. Considering that the Magnificent Seven achieved even higher gains last year, it should come as no surprise that tech bulls are taking a breather at these levels or demanding exceptional results to justify such steep valuations.
According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, when it comes to forecasts from tech companies, anything less than mind-blowing is considered weak given their current valuations. Despite market conditions being overbought and valuations being stretched, investors have been flocking to tech since the beginning of the year.
Now, with the ongoing earnings season, it appears that long-awaited profit-taking is on the horizon for the U.S. technology stocks.
Consequently, we are witnessing many shareholders cashing out their winnings rather than continuing to take risks.
Tech Stocks Facing Challenges Amidst Profit-Taking and Rate Cut Uncertainties
The tech sector has been experiencing a noticeable increase in sell tickets, signaling a shift in sentiments among investors. Daniel O’Regan, the managing director of equity trading at Mizuho Securities, highlights that the era of easy money may be coming to an end. Profit-taking is becoming more prevalent among tech stocks, impacting their performance.
Compounding the challenges, expectations for an interest-rate cut from the Federal Reserve in March have diminished in recent weeks. This change is significant because tech stocks are highly sensitive to interest rates when it comes to valuing future earnings. The Fed recently held rates steady, but there is speculation about potential rate cuts in the future.
However, some analysts argue that even a more dovish central bank may not be sufficient to reignite tech stocks’ growth. The sector has become quite expensive, which could limit its ability to bounce back.
Despite these trials, there are still a few bright spots in the tech industry. For instance, Super Micro Computer, a leading independent manufacturer of high-end AI servers for data centers, has provided exceptional guidance. Additionally, chip maker Advanced Micro Devices has increased its 2024 sales forecast for its datacenter artificial-intelligence chip by an impressive 75%. Nevertheless, there are some investors who had even higher expectations.
Furthermore, there are eagerly anticipated upcoming results from key players in the tech realm. Amazon.com, Apple, Meta, and Nvidia are scheduled to report their earnings soon. However, on Wednesday, all four stocks experienced a decline of more than 1%.
With all these factors at play, the remaining four Magnificent Seven firms in the tech sector face immense pressure to defy the current trend and deliver outstanding results. However, many investors seem reluctant to bet on their success.