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Nvidia In Correction Territory — Did AI-Led Tech Stock Bubble Just Burst? This Data Point Offers A Clue.

Published 20/04/2024, 17:00
© Reuters.  Nvidia In Correction Territory — Did AI-Led Tech Stock Bubble Just Burst? This Data Point Offers A Clue.

Benzinga - by Shanthi Rexaline, Benzinga Editor.

The extended sell-off seen in the market since April 12 has been led by high-profile tech stocks, which ironically were the leaders of the rally that began in 2023.

The Tech Rout: The broader market, which rallied through 2023, carried over the momentum into the new year and the upward trend continued until March. In April, rate-cut bets began to unravel as inflation stalled its downtrend. Federal Reserve officials, who hinted at up to three Fed funds rate cuts following the March monetary policy meeting, began to sing a different tune.

Bond yields began to spike higher in reaction, with the 10-year note yield jumping to a high of 4.696% this week before slightly easing off the level.

All these factors exerted downward pressure on tech stocks, which fall under the category of growth stocks. A higher interest-rate environment is seen as detrimental to these stocks because it diminishes their long-term discounted cash flow and makes it harder for them to secure low-cost debt financing.

The tech-heavy Nasdaq Composite Index has pulled back to its lowest level since Jan. 31, dragged by six consecutive sessions of losses. The Nasdaq 100 Index, which comprised the biggest non-financial tech stocks, ended at its lowest since Jan. 16.

The Invesco QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq 100 Index, settled Friday’s session down 2.07% at $414.65 compared to a more modest 0.87% slide by the SPDR S&P 500 ETF Trust (NYSE:SPY), an exchange-traded fund that mirrors the broader S&P 500 Index. This disparity highlights that the negative sentiment is predominantly directed towards tech stocks.

Source: Benzinga Pro

High-flier Nvidia Corp. (NASDAQ:NVDA), which was on stratospheric rally due to its AI leadership, was brought down to the ground with a thud. The stock ended the session down 10% at $762, and it has a 6.22% weighting in the Nasdaq 100 Index. Microsoft Corp. (NASDAQ:MSFT) and Apple, Inc. (NASDAQ:AAPL), the top stocks in the index in terms of weighting (8.83% and 7.58%, respectively), fell just over 1.2% each.

In a CNBC interview, Cleo Capital Managing Director Sarah Kunst said this may not be the time to buy the dip. “I think that this is a scary time to buy in,” she said, adding, “The reality is when you have this much global uncertainty thinking that you're going to be able to time the bottom I think is a fool's errand.”

Premonition of 2000-Like Bust? Doomsday theorist have begun calling for a 2000-like stock market crash, which was set in motion by the dot-com bubble. These calls may be unfounded due to both fundamental and technical reasons.

In a note released in late February, prominent tech analyst Daniel Ives said the current AI frenzy and the resultant tech rally is nowhere near the 1999/2000 period. During the 2000 dot-com bubble, sky-high valuations, lack of monetization and infrastructure, weak balance sheets, froth business models and macro backdrop characterized the tech world, he said.

This time around, beyond the fundamentals, the macroenvironment and occasional flaring up of geopolitical tensions are playing a big role.

Technically, the QQQ chart shows that the current downturn hasn’t been accompanied by heavy volume, which makes the down move less convincing. On the contrary, during the dotcom bubble in 2000 and the sell-off that coincided with the Fed’s first rate-hike in March 2022, the volumes were substantially higher than the current period’s.

All in all, the next few weeks, when numerous high-profile tech companies are set to report earnings, will probably provide clearer insight into the near-term direction of tech stocks.

The Technology Select Sector SPDR Fund (NYSE:XLK) ended Friday’s session down 2.06% at $192.53, according to Benzinga Pro data.

Read Next: Tesla’s Horror Week Ends With Another Price Cut, Rivian’s Second Round Of Layoffs, Lucid Touts Longest-Range Domestic EV And More: Biggest EV Stories Of The Week

Photo: Shutterstock

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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