The Nasdaq 100 Index has experienced an 8% decline, edging towards correction territory, as investors await crucial earnings reports from major technology companies.
The downturn comes amid a significant sell-off in Big Tech stocks, fueled by concerns over high valuations and escalating costs related to artificial intelligence (AI) investments.
The recent slide in the Nasdaq 100 was triggered by a disappointing earnings report from Alphabet, which intensified a broader market rotation out of Big Tech. Investors are now focused on the upcoming earnings reports from Microsoft, Meta Platforms, Apple, and Amazon—companies with a combined market value approaching $10 trillion.
These reports, expected this week, are seen as critical for market direction, with Microsoft set to report, followed by Meta, Apple, and Amazon over the subsequent days.
“These earnings are really important,” said Michael O’Rourke, chief market strategist at Jonestrading. “If you can’t beat expectations then I think the interpretation is that AI is not delivering the way people hoped.”
The cautious sentiment among investors stems from worries about the substantial costs associated with AI investments and the potential for delayed returns. As a result, there has been a shift towards sectors that had previously lagged, such as small-cap companies, financials, and industrial firms. Additionally, some investors are implementing hedging strategies to protect against further declines in Big Tech stocks.
Market volatility has been on the rise, reflected in the spike of the Cboe Volatility Index, as investors brace for potential market turbulence. Attention is also focused on the US Federal Reserve’s upcoming interest rate decision, which could have significant implications for market stability and the likelihood of future rate cuts.
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“There are growing concerns that the return on investment from heavy AI spending is further out or not as lucrative as believed, and that is rippling through the whole semiconductor chain and all AI-related stocks,” said James Abate, chief investment officer at Centre Asset Management.
This week’s earnings reports from Microsoft, Meta, Apple, and Amazon are viewed as pivotal. To reassure investors and stabilize the Nasdaq 100, these companies must deliver results that exceed expectations, particularly in light of the ongoing debate about the sustainability of AI investments. The market awaits these reports with heightened anticipation, as they are expected to set the tone for the near-term outlook in the tech sector.
Big Tech was priced for perfection, and it has accounted for nearly all the market’s gains, which just underlines the group’s vulnerability,” Abate said.
