The one-month selloff in technology stocks might indicate sector rotations by major funds as the investment cycle shifts. Quarterly earnings reports also suggest a slowdown in growth due to capacity constraints, driven by the surge in AI demand.
ADVERTISEMENTTechnology stocks have faced strong headwinds over the past month, driven by disappointing quarterly earnings and a broad risk-off sentiment in global markets. Investors have begun unwinding their positions in artificial intelligence (AI) stocks, reallocating funds to sectors likely to benefit from lower interest rates, such as real estate and utilities.
On Wall Street, most of the so-called “Magnificent Seven” stocks have seen sharp declines over the past month, with leading AI frontrunners like Microsoft, Nvidia, Amazon, and Alphabet all losing more than 10%, placing them in correction territory. Meta Platforms was the only tech giant to outperform the S&P 500, posting a modest 1% gain, while Tesla slumped 17% due to a continued slowdown in electric vehicle sales.
European firm takes a hit
In Europe, the largest technology firm, ASML, saw its shares plunge 20% over the past month, reflecting the global trend. ASML, often regarded as a bellwether for AI stocks in Europe, was severely impacted by stricter US export restrictions on chips to China.
The Dutch semiconductor machinery manufacturer reported strong quarterly earnings in July but offered disappointing guidance for the current quarter, suggesting potential negative effects from the export curbs.
AI-related stocks in Asia have also experienced sharp declines over the past month, highlighting a shift in the investment cycle as economic conditions evolve.
Investors scrutinise big tech earnings amid massive AI take-up
According to research firm FactSet: “The market is rewarding positive earnings surprises reported by S&P 500 companies less than average and punishing negative earnings surprises reported by S&P 500 companies more than average.”
This trend suggests that investors are scrutinising earnings growth more closely than usual, particularly for fast-growing AI companies.
Many major tech companies reported slowing earnings growth in the second quarter or provided weaker-than-expected guidance due to three key factors: capacity constraints, rising capital expenditure on AI infrastructure, and the economic slowdown in China.
In its earnings report last month, Microsoft highlighted that capacity constraints played a significant role in limiting the company’s cloud growth, a critical driver of overall performance.
Microsoft invested $19 billion (€17.4 billion) to expand data centre capacity for AI training and other workload demands. Similarly, TSMC, the world’s largest semiconductor chip manufacturer, warned that AI chip output will remain constrained until 2025, longer than previously expected.
TSMC, a major supplier to Apple and Nvidia and the largest customer of European tech firm ASML, underscores how closely intertwined global technology companies are and how their stock performances are interlinked.
Surging demand for AI chips has exacerbated production pressures, worsening capacity constraints, according to industry leaders. Analysts believe that stretching capacities are a challenge facing all hyperscalers.
As a result, tech companies will need to increase their spending on AI projects to keep up with computing demands and maintain their leadership in the industry. Goldman Sachs estimates that US tech giants, including Microsoft, Alphabet, Meta, and Amazon, will collectively invest more than $1 trillion (€0.91 trillion) in the coming years.
US restrictions on China may affect AI firms
Additionally, US policy measures aimed at curbing China’s technological advancement could impact the growth of AI companies, compounded by the country’s slowing economic growth.
Export restrictions on China may significantly affect AI chip makers such as AMD, Nvidia, and ASML, given the critical market share that Chinese buyers represent in their overseas sales.
ADVERTISEMENTMoreover, sluggish domestic demand in China and intensifying competition from local rivals have notably weighed on the performance of companies such as Tesla and Apple. This adds another layer of risk for major technology players amid rising geopolitical tensions and the trend towards de-globalisation.
Sector rotations emerge amid shifting economic cycles
From a macroeconomic perspective, another factor contributing to the selloff in tech stocks is profit-taking amid the emerging trend of sector rotations, set against the backdrop of shifts in economic cycles.
Major central banks have either begun or are poised to initiate a rate-cutting cycle in response to cooling inflation and slowing economic growth. As a result, sectors such as utilities and real estate, which were among the hardest hit by surging interest rates in 2022 and 2023, are starting to regain favour among investors, while AI-driven tech stocks are being sold off to secure profits.
Notably, value investing veteran Warren Buffett offloaded 510 million Apple shares in the first two quarters of this year, reducing his investment firm Berkshire Hathaway’s stake in the company from 56% to 41%. Despite this downsizing, Apple remains the firm’s largest equity holding. Investors will be keenly observing Buffett’s next moves at this critical juncture.
ADVERTISEMENTThis week, all eyes will be on the upcoming inflation data from the UK and the US, set to be released on Wednesday and Thursday, as investors seek to gauge macroeconomic shifts and uncover clues about future market trends.