Tech stocks experienced significant volatility over the past week, highlighted by a sharp selloff on Thursday that was partially reversed with a modest recovery on Friday. Despite the fluctuations, some traditionally weaker sectors managed to rally, providing a counterbalance to the turbulence in technology stocks. Investor anxiety is growing, particularly concerning the rapid increase in corporate borrowing needed to support the ongoing AI expansion.
The week began with a surge in tech, as the Morningstar US Technology Index rose over 2.5% on Monday. However, this momentum quickly dissipated, culminating in a 2.43% decline on Thursday before a slight recovery on Friday left tech stocks ending the week up marginally by 0.20%. In contrast, the broader Morningstar US Market Index finished the week with a slight drop of 0.09%, influenced heavily by tech sector jitters. While healthcare and energy stocks posted gains, consumer cyclicals struggled with a 2.60% decline.
Market participants are grappling with the phenomenon of concentration risk—when a decline in the tech sector disproportionately impacts overall market indices. Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, noted that such volatility from tech trends has been a persistent concern for investors.
Notably, the selloff this week did not stem from a single catalyst. Instead, it coincided with the longest government shutdown in U.S. history, which drew closer to resolution as markets opened on Monday and was officially lifted by Thursday. Additionally, shifting expectations around a potential interest rate cut by the Federal Reserve added to the uncertainty, particularly as recent comments from officials turned increasingly hawkish.
Pappalardo highlighted that while a month of missing data wouldn’t drastically change the market outlook, if such disruptions delayed a December rate cut, it could lead to broader consequences. He speculated that ongoing reallocations by major funds might also have influenced market movements, as many fund managers prefer to adjust their positions ahead of year-end.
Concerns surrounding mega-cap tech firms’ ability to meet elevated profit expectations have contributed to the uncertainty. Despite reporting strong third-quarter earnings, investors are wary of the substantial borrowing tech companies have engaged in to finance AI infrastructure. Pappalardo suggested that increasing debt levels are tightening firms’ margins for error, enhancing market volatility.
Looking ahead, investors are encouraged to maintain perspective amidst the tumultuous trading week. Both Pappalardo and Douglas Porter, chief economist at BMO Capital Markets, emphasized that the U.S. stock market remains up 15% year-to-date, a performance they believe is noteworthy given historical averages. With only weeks left in the year, some stabilization in markets is anticipated as companies continue to show robust earnings despite recent turmoil in tech. Strategists generally concur that underpinnings supporting the equity bull market remain strong, bolstered by prospects of further rate cuts from the Fed and continued solid earnings from tech firms.
