The Tech Stock Sell-Off Isn’t Worrying Some Stock-Market Experts. Is a ‘Bubble’ About to Pop?

Key Takeaways

• Tech stocks tumbled on Friday, with semiconductor stocks leading the sell-off after a blistering run-up to record highs in recent weeks.

• Some market watchers attributed the rout to profit-taking, and argued market fundamentals suggested tech stocks would rebound to lead markets higher into the end of the year.

Is gravity finally catching up with the AI rally?

Tech stocks continued to fall back down to Earth on Friday after a strong jobs report kicked yesterday’s AI stock sell-off into overdrive. The Nasdaq Composite plummeted more than 4%, its worst daily performance since last April’s “Liberation Day.”

The market’s biggest winners so far this year were Friday’s biggest losers. Shares of chipmaker Marvell (MRVL), which surged Tuesday after a shoutout from Nvidia CEO Jensen Huang, slumped 17%. Sandisk (SNDK) and Micron (MU)—up a respective 670% and 280% year-to-date earlier this week— tumbled more than 11%. Chip giants Nvidia (NVDA) and Broadcom (AVGO), with a combined market value of nearly $7 trillion, dropped 6% and 8%, respectively.

Why This Is Important

Market watchers have been expecting tech stocks to take a breather after a months-long rally that minted a new trillion dollar company and propelled the major indexes to record highs. After Friday’s bloodbath, investors may look to SpaceX’s upcoming IPO to reinvigorate tech stocks.

While the tech rout was exacerbated on Friday by interest rate concerns, many market watchers were sanguine about the sell-off.

“It appears to be a case of profit-taking in the semiconductors,” wrote Navellier analysts on Friday. Semiconductor stocks have soared this year on red-hot demand for chips from AI data centers. The PHLX Semiconductor Index (SOX) dropped 10% on Friday, but is still up 70% this year.

Chip stocks’ gains have stoked debate about whether Big Tech’s data center spending is fueling an AI bubble. Bears doubt whether the tech giants spending hundreds of billions on AI will recoup their investments, and that excessive optimism is feeding a speculative frenzy akin to the Dotcom Bubble. Bulls expect an AI productivity boom to sustain demand for computing capacity.

“I think if we’re in a bubble, we’re still early stages,” Warren Pies, co-founder of 3Fourteen Research, told CNBC on Friday. According to Pies, six stocks in the Nasdaq 100 have risen more than 400% over the past year, a far cry from the peak of the Dotcom Bubble when that figure was 22.

“I think there’s way too much pessimism and worry at this point in time,” Pies said. “And the metrics don’t back it up.”

AI infrastructure investment was instrumental in making the first quarter the S&P 500’s strongest period for corporate profits in years, and tech giants have signaled they have no plans to slow their spending anytime soon. Pies expects that spending to put tech stocks back in the driver’s seat eventually. “We’re heading higher later this year, [and] it’s gonna have to be tech-led,” he said. “These rotations will be temporary.”

The next test of Wall Street’s hunger for tech stocks could come late next week when Elon Musk’s SpaceX may hit markets in the largest IPO in history. Its debut could set the tone for two other mega-IPOs expected later this year from frontier AI labs Anthropic and OpenAI.

Read the original article on Investopedia