What’s causing the massive selloff in tech stocks?

08/05/2024

The parent company of Facebook and Instagram, Meta, opened 7.6 percent lower, while Alphabet, Google’s parent company, saw a 6.8 percent decline. Among major tech stocks, Microsoft experienced the least volatility, falling 4.8 percent when the market opened on Monday.

By midday, all seven companies’ shares had seen some recovery, though they remained lower.

Monday morning witnessed a sharp decline in tech stocks amid growing concerns over a broader market downturn. Investors were rattled by Friday’s weaker-than-expected jobs report, which revealed that only 114,000 jobs were added in the U.S., and the unemployment rate rose to 4.3 percent.

On Monday, the Dow Jones Industrial Average plunged by 1,100 points at the opening, reflecting a 2.8% drop. Meanwhile, the Nasdaq Composite tumbled 6.2%, and the S&P 500 index fell 4.2% shortly after trading began.

Analysts at Wedbush Securities commented in a research note on Saturday, “Yesterday’s weak jobs report has triggered a tech sell-off driven by recession fears and concerns that the Fed is too late in its cutting cycle, with tech stocks at the heart of this Category 5 storm.”

Major tech stocks, already volatile following mixed second-quarter results over the past two weeks, were further shaken by Warren Buffett’s Berkshire Hathaway decision to cut its stake in Apple by more than half.

However, Wedbush analysts argued in another note on Monday morning that now is “not the time to panic on the tech trade.”

“We are receiving inquiries from investors worldwide, asking if this historic tech bull market and the run in tech stocks is over,” they wrote. “In our opinion, this is simply a temporary dip in the ongoing multi-year bull market for tech stocks, and it requires strategic management.”

Amid widespread enthusiasm for the potential of Artificial Intelligence (AI), the tech sector has driven most of the market’s gains this year. According to Axios, by the end of June, the Magnificent Seven accounted for 75 percent of the S&P 500’s gains.

However, in recent weeks, tech stocks have also pressured the market. Following disappointing earnings reports from Alphabet and Tesla at the end of July, both the S&P 500 and the Nasdaq Composite reached multi-week lows.

Despite the current sell-off, John Higgins, Chief Markets Economist at Capital Economics, doubts that the AI-fueled market rally is over.

“This situation isn’t reminiscent of the 2000 dot-com bubble burst, nor does it mirror the 1998 temporary stock price dip that coincided with a strengthening yen,” Higgins analyzed on Monday.

He added, “However, there is a significant difference between now and 1998: there are no major problems and risks in the U.S. financial system.” “Our best estimate is that the stock market will recover, as the economy is better than feared and investors regain their enthusiasm for AI.”