On Wednesday, the U.S. stock market faced a severe sell-off, which was the worst it has seen since 2022, as a broad retreat in tech stocks significantly impacted the major indices. The Nasdaq Composite, known for its heavy weighting in technology and growth stocks, experienced its first decline of 3% or more in 400 trading days. This marked a sharp reversal from the recent bullish trend driven by excitement over artificial intelligence (AI) advancements.
The major tech stocks that have been leading the market higher in recent months bore the brunt of this downturn. The Nasdaq ended the day down 3.6%, which was its largest drop since October 2022, a period when the Federal Reserve was aggressively raising interest rates to combat high inflation. The broader S&P 500 index fell by 2.3%, its worst single-day decline since December 2022, while the Dow Jones Industrial Average decreased by 1.2%, translating to a drop of 504 points.
Tesla was at the forefront of this sell-off. The company’s shares plunged by 12% after it announced a delay in its much-anticipated robotaxi rollout. This development not only hit Tesla’s stock hard but also had a ripple effect across the technology sector, contributing to the broader market decline. Alphabet, the parent company of Google, also saw its stock fall by more than 5%. Despite reporting earnings that were slightly above analysts’ expectations, Alphabet’s stock was pressured by concerns about the slow return on investment from its AI ventures. CEO Sundar Pichai’s comments about the long-term nature of AI development raised doubts among investors, who had high expectations for immediate gains from these technologies.
The collective impact of these earnings reports was substantial. According to Dow Jones Market Data, the combined market value of the Magnificent Seven—consisting of major tech firms like Tesla, Alphabet, Microsoft, Nvidia, Meta Platforms, Amazon, and Apple—dropped by $768 billion. This represented the largest loss in market value on record since Meta Platforms went public as Facebook in 2012. The sell-off reflects how quickly investor sentiment can shift from exuberant optimism to caution, especially when high expectations are not immediately met.
David Lundgren, a portfolio manager at Little Harbor Advisors, emphasized that the market’s high expectations for these tech stocks mean that merely meeting earnings estimates is insufficient. Investors are now looking for significant outperformance beyond the consensus projections, also known as the “whisper number,” which reflects more optimistic expectations.
The sell-off extended beyond just the top tech stocks to include other companies involved in the AI supply chain. For instance, shares of Super Micro Computer fell by 9.1%, Broadcom dropped by 7.6%, and both Qualcomm and Advanced Micro Devices saw declines of more than 6%. These companies are critical to the AI infrastructure, and their losses underscore the broad impact of the sell-off within the technology sector.
In contrast to the technology sector’s struggles, other parts of the market showed resilience. The S&P 500’s utilities, consumer staples, healthcare, and energy sectors ended the day in positive territory. This shift highlights a rotation in market leadership, with investors moving money away from the tech sector and towards more stable or defensive areas of the market. Notably, defense contractor Lockheed Martin saw its stock rise by 2.8%, reaching an all-time high, while AT&T recorded its largest gain of the year. However, Visa’s shares fell by 4% following a quarterly revenue report that fell short of analysts’ expectations.
The recent tech stock downturn has prompted investors to seek opportunities in smaller and midsize companies. The Russell 2000 index, which tracks these smaller firms, declined by 2.1% on Wednesday but has outperformed the S&P 500 by 10.9% over the past 11 trading sessions. This shift in focus suggests that smaller companies could benefit from anticipated rate cuts and other market adjustments.
In the commodity markets, oil prices edged up by 0.8%, closing at $77.59 per barrel, after trading at their lowest levels since early June. Copper futures, which had seen price increases earlier in the year due to AI-driven data-center expansion, continued their decline for the eighth consecutive day.
Looking forward, the market will be watching closely for earnings reports from companies such as Northrop Grumman, Honeywell International, and Norfolk Southern, as well as Colgate-Palmolive, Bristol Myers Squibb, and 3M. These upcoming results will provide further insights into the health of various sectors and the sustainability of the current market rotation.
Currently, the market remains on edge, with the CBOE Market Volatility Index, known as Wall Street’s fear gauge, spiking at its steepest rate since 2022. José Torres, a senior economist at Interactive Brokers, noted that the current conditions could lead to a potentially severe market correction, reflecting a prevailing “risk-off” sentiment among investors who are increasingly cautious about the broader economic outlook.