MW Tech sector plunges as Wall Street's fears over stretched stock valuations intensify
By Christine Idzelis
'Valuation only matters at extremes, and large-cap U.S. stock indices are now well into the 5th "mania" in 100+ years,' warns Stifel's Barry Bannister
U.S. stocks were selling off Monday, as fears that China's artificial intelligence company DeepSeek could disrupt profits for Big Tech stocks spooked investors already worried about their high valuations.
While Big Tech stocks propelled the S&P 500 to a big rally last year as investors cheered developments in artificial intelligence, the bull run also left investors concerned that their concentration in the widely followed U.S. equities index made it vulnerable to a selloff.
The S&P 500 SPX was down a sharp 1.9% in early afternoon trading, while the technology-heavy Nasdaq Composite COMP dropped 3.5% and the Dow Jones Industrial Average edged up a modest 0.2%. The Roundhill Magnificent Seven ETF MAGS - which holds seven closely followed Big Tech stocks including Nvidia Corp. $(NVDA)$, Microsoft Corp. $(MSFT)$, Apple Inc. $(AAPL)$, Google parent Alphabet Inc. $(GOOGL)$, Amazon.com Inc. $(AMZN)$, Tesla Inc. $(TSLA)$ and Facebook parent Meta Platforms Inc. $(META)$ - was slumping Monday by more than 3%, according to FactSet data, at last check.
"Given the runup in markets over the past two years, it is well worth considering valuations in markets and concentration in portfolios," David Kelly, chief global strategist at J.P. Morgan Asset Management, said in a note emailed Monday. "When the dot com bubble burst in March of 2000, the S&P 500 fell by 47% over a two and a half year period and was still down by 21% two years after the trough."
As recently as Jan. 23, "the S&P 500 was selling at 22 times forward earnings, 1.6 standard deviations above its 30-year average," said Kelly. And "the top 10 stocks within the index were sporting a forward P/E of over 30 times," he wrote, referring to the price-to-earnings ratio.
The S&P 500, a gauge of U.S. large-cap stocks, notched a record closing high of 6,118.71 on Jan. 23, according to Dow Jones Market Data. Big Tech stocks have massive market values, translating into outsize weighting in the S&P 500 index.
Stifel's chief equity strategist, Barry Bannister, cautioned in a note Sunday that "valuation only matters at extremes, and large-cap U.S. stock indices are now well into the 5th 'mania' in 100+ years."
Shares of AI-chip maker Nvidia were plummeting 15% in early afternoon trading on Monday, according to FactSet data, at last check. Even with that steep selloff, Nvidia has gained almost 100% over the past 12 months.
Investors on Monday appeared worried about what Wall Street's sudden focus on Chinese AI app DeepSeek may mean for U.S. companies like Nvidia and Broadcom Inc. that have been benefiting from the recent hype around artificial intelligence.
Nvidia and Broadcom were the top two weights on Friday in the portfolio of the iShares Semiconductor ETF SOXX, an exchange-traded fund tracking an index of semiconductor stocks listed in the U.S. that's fallen under pressure Monday. The fund was sliding 7% early afternoon Monday.
See: Does DeepSeek spell doomsday for Nvidia and other AI stocks? Here's what to know.
Wall Street's so-called fear gauge spiked Monday morning, with the Cboe Volatility Index VIX subsiding some by midday but still up almost 25% Monday afternoon - at around the 18.5 mark.
If the S&P 500's price-to-earnings ratio has "peaked as signs indicate," then the outperformance of large-cap growth relative to value equities also has topped, said Bannister.
Investors' excitement around U.S. large-cap growth stocks is also reflected in the runup of the Nasdaq Composite, which last year jumped 28.6% after surging 43.4% in 2023, FactSet data show. The S&P 500, whose biggest sector is information technology, rallied 23.3% last year, building on its 24.2% gain in 2023.
"Although some investors expect a smooth hand-off from Growth to Value," wrote Bannister, "history and our economic views suggest otherwise."
Value stocks were faring much better than the growth stocks in Monday's selloff in the U.S.
The Russell 1000 Value Index RLV was about flat in afternoon trading, while the Russell 1000 Growth index RLG slid 3.1%, according to FactSet data, at last check.
Tumbling tech stocks in the S&P 500 made it the index's worst-performing sector XX:SP500.45 on Monday afternoon by far, down around 6%.
Although Big Tech cyclical growth stocks have dominated the S&P 500 amid 2025's "euphoria," Bannister anticipates "defensive value" may outperform on expectations for weaker gross domestic product in the second half this year "in tandem with sticky inflation."
Examples of defensive value in the equities market include utilities, pharmaceuticals, biotech and life sciences, healthcare equipment and services, household products and commercial and professional services such as "waste stocks," according to his note.
While utilities are traditionally seen as a defensive sector, they also have been viewed as a beneficiary of artificial intelligence due to the increased power that investors have expected generative AI would require.
The S&P 500's utility sector was down 3.5% on Monday afternoon, the second-worst performing sector in the index after tech, according to FactSet data, at last check. While most of the S&P 500's 11 sectors were trading in the red, consumer staples and healthcare each had sharp gains of around 2%.
Financials and real estate were also in the green, but with modest gains on Monday afternoon, according to FactSet data, at last check.
In a sign of the broad selloff, the Invesco S&P 500 Equal Weight ETF RSP, an exchange-traded fund that equally weights stocks in the S&P 500, was down 0.2% in afternoon trade.
Investors will be watching closely this week for Big Tech companies to begin reporting their quarterly earnings, with results from Microsoft, Meta and Tesla due out on Jan. 29. That's the same day as the highly anticipated outcome of the Federal Reserve's monetary policy meeting.
Bannister cautioned that beyond investor exuberance for U.S. large-cap stocks, "a mild case" of stagflation later this year also risks contributing to a potential S&P 500 correction of around 10% this year to around 5,500. The index closed Friday at 6,101.24.
"If the Mag-7 disappoint, they could drag the S&P 500 down significantly since they account for a whopping 30.5% of the market cap of the index," warned Yardeni Research in a note Sunday. "They also account for a hefty 21.6% of the forward earnings of the S&P 500."
-Christine Idzelis
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January 27, 2025 13:22 ET (18:22 GMT)
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