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The technology sector is often volatile.and not always in an investor-friendly way.
Wall Street has been hit hard in recent weeks, with Standard & Poor's 500 (SNPINDEX: ^GSPC) The index fell 8.5% from July 16 to August 5. Over the same period, heavy technology stocks fell Nasdaq 100 The index recorded a 12.3% decrease in prices. Vanguard Information Technology ETF (NYSE: VGT)The US stock market index, which focuses on stocks in the technology sector, fell 14.8%.
This decline has been led by some real heavyweights. artificial intelligence (Artificial Intelligence) Chip Designer Nvidia (NASDAQ: NVDA) It recorded a 20.5% price drop during that three-week period, for example. supercomputer (NASDAQ: SMCI) — also known as Supermicro — took a hit of 30.6% over the same period, as the veteran chipmaker Intel (NASDAQ: INTC) It suffered a 41.4% collapse.
The market has already started to recover from this sharp decline, but the technology sector continues to lag the broader market. Let’s take a look at the driving forces behind this tech sector decline and what it means for investors.
1. Mixed earnings reports
The third earnings season of 2024 is already coming to a close, and it hasn’t always been kind to tech investors. Many trend-setting tech stocks have either disappointed or set modest guidance targets for the second half of the year, often with price-cutting effects.
The list of financial reports that moved the market includes Supermicro and Intel. Both companies missed earnings targets agreed upon by Wall Street and reported tough roadblocks ahead. Intel’s woes inspired a $10 billion cost-cutting program and the company’s dividend program was suspended.
Management comments highlight what's going on:
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“The second half of the year is more challenging than we previously expected,” Intel CEO Pat Gelsinger said, reflecting the difficult economic situation.
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Supermicro CEO Charles Liang noted that the company’s long-term investments in factories are hampering its financial results. “We expect short-term margin pressure to ease and return to normal range before the end of fiscal 2025,” he said.
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Arm Holding (NASDAQ: ARM) CFO Jason Child gave soft guidance for full-year revenue and margin, saying, “Inventory issues in the IoT and industrial networking markets appear to be more persistent than originally suggested.” In other words, the outperformance in recent quarters has led to a buildup of pipelines and warehouses.
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in Trade Office's (NASDAQ: TTD) On an earnings call, CEO Jeff Green said his ad-buying clients were “dealing with a lot of uncertainty.” Companies are doing well, but consumers are holding on tight to their wallets, reducing the effectiveness of marketing messages. “This has big implications for how companies market products, from pricing to packaging to advertising,” Green said.
There are some common threads between these analyses. Most of these guiding lights lead me to…
2. …this damn economy
With inflation easing, the US Federal Reserve plans to cut interest rates in September, and the economy as a whole is beginning to recover.
But the economic crisis is not over yet, and there is still room for nervous investor reactions. Any hint that interest rate cuts may be postponed sends the market into another tailspin. A slight rise in interest rates in Japan has already triggered another bearish reaction in markets around the world. Add to that the sentiment and concerns expressed by business leaders in the previous section, and you have a sense that this bull market is starting to feel unstable.
That’s bad news for established companies. It’s not good news for promising innovators, either—and it seems like a problematic time to raise funding or go public. As a result, both established leaders and smaller startups are taking a hit to their projected market value.
3. Investors lose patience as AI boom stalls
Of course, the list of sharp price declines includes many of the leading names in AI technology. Nvidia’s stock decline alone has wiped $637 billion off its market cap from the AI rally. And the company hasn’t even reported its July results — its second-quarter update is scheduled for August 28. Here’s where investors are applying the lessons learned from its peers to Nvidia’s situation.
Maybe—just maybe—market makers are getting a little too excited about the early AI boom.
Yes, generative AI is a technology with the potential to be transformative, but there are still questions to be asked. For example:
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But how much of this revolution will lead to lasting changes in AI business outcomes? Nvidia’s early lead in hardware could fade as other chip designers develop similar devices, perhaps at lower cost or with more efficient power and cooling solutions.
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OpenAI's ChatGPT is the best large language model (LLM) to date, but another engine may one day steal its title.
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I've heard many business leaders fear that generative AI will change the industry, but there aren't many real-world examples of this impact yet.
Some of these fears may never come true, and this may be just a temporary lull in the frenetic pace of AI innovation. But perception quickly becomes reality in the stock market, and every investor is working with an incomplete set of information about the current and future situation.
On this note, the last section of my article writes itself.
4. Is it time to make some profits?
Despite recent price declines, the market’s favorite AI products remain very high. On August 5, at the low point of the brief panic, shares of Nvidia and Supermicro had more than doubled so far this year. Arm Holdings gained 47% on that date.
I can’t blame nervous investors for converting some paper gains into cash under these circumstances. The resulting price cuts have made the same stocks a bit more expensive for the next wave of AI bullish investors, and that’s where things stand.
Ultimately, the recent decline in tech stocks was just normal market noise. Opportunistic investors should watch for this type of short-term buying opportunity, with the obvious caveat that the next downward move may have staying power. No one really knows until it happens.
Until then, it’s best to take a calm look at the current market and reposition your portfolio to match your long-term views. Personally, I’m a bit concerned about Nvidia’s grip on the hardware crown while Intel and The Trade Desk look undervalued today. Your estimates may differ, but feel free to start your next round of stock picking research from there.
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Anders Bylund The Motley Fool has positions in Intel, Nvidia, The Trade Desk, and the Vanguard World Fund-Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Nvidia and The Trade Desk. The Motley Fool recommends Intel and recommends the following options: Buy $45 January 2025 calls on Intel and sell $35 August 2024 calls on Intel. The Motley Fool has Disclosure Policy.
Why are investors dumping tech stocks? 4 reasons why the tech sector is down. Originally posted by The Motley Fool
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