'Like we've crashed into a brick wall': AI darlings sink as Nasdaq 100 enters correction territory

The Nasdaq 100 Index tumbled into correction territory, erasing over $2 trillion in value in just over three weeks. The downturn highlights an intense rotation away from Big Tech stocks that had been buoying the market for over a year. 

By midday Friday, the index was down 2.2%, marking a loss of more than 10% since its peak on July 10. Despite this plunge, the Nasdaq 100 remains up nearly 10% for the year.

Several tech giants have faced significant sell-offs. Nvidia Corp. and Tesla Inc. have both fallen over 20% from their recent highs, entering bear-market territory. Microsoft Corp. and Amazon.com Inc. have each dropped more than 10%, although, except for Tesla, these companies are still up for the year.

"This is an amazing about-face, like we've crashed into a brick wall," said Bill Stone, chief investment officer at Glenview Trust Co was quoted in a Bloomberg report. "We had a heck of a straight line up, and those don't last forever, especially since expectations got so high. You clearly can't just own tech; you need some exposure to the more defensive areas."

Amazon and Intel Corp. were among the biggest decliners. Amazon fell nearly 9% on Friday due to heavy AI spending plans, while Intel plummeted 27% following a grim forecast. The sell-off intensified as investors grew wary of high-profile earnings disappointments and the high valuations of tech stocks, leading them to shift their investments to more defensive sectors like utilities.

Concerns that tech stocks are overvalued, AI-driven gains overhyped, and market is too concentrated have only spiked in the past one year. The Cboe NDX Volatility Index, which measures the 30-day implied swings in the Nasdaq 100 Index, briefly crossed 25, a level last seen in October 2023. Volatility indexes for Apple and Amazon have also spiked, and the Cboe Volatility Index, or VIX, rose past the 20 threshold for the first time since October.

The rotation away from tech began after inflation data in June suggested cooling prices, leading to bets that the Federal Reserve might cut interest rates at its next meeting in September. Small-capitalization stocks initially benefited, with the Russell 2000 rising about 4.5% since then, compared to the Nasdaq 100's 3.8% decline.

The tech rout gained momentum after Alphabet Inc. reported capital expenses exceeding estimates by $1 billion, largely due to investments in artificial intelligence. This spurred investor fears over unbridled spending with only distant prospects for higher revenue. Microsoft and Amazon joined Alphabet in signaling heavy AI spending, further unsettling the market.

"I don't think they'd be doing this kind of spending if demand wasn't there, which bodes well for the long-term AI story," said Stone, who has been adding to his Microsoft position amid the sell-off. "However, there are all kinds of questions about the timing of AI demand, AI spending, and this kind of selling are the bumps in the road that come with that kind of thing."

Amid the turmoil, there were some bright spots. Apple Inc. rose 2% on Friday following a positive earnings report, and Meta Platforms Inc. also saw gains earlier in the week due to strong results.