Market Flash: The tech selloff accelerates

Market movements following Wednesday’s US mid-term results became more pronounced on Thursday.

On Wednesday, selling was concentrated among companies most exposed to the AI data centre buildout. This included semiconductor companies such as Nvidia as well as ‘neocloud’ businesses like Coreweave, which lease data centre computing capacity.

At this stage, the market was highly selective. Outside of companies directly linked to AI infrastructure, sentiment was supported by optimism around the divided government as well as a sharp drop in oil prices. Most stocks rose on the day, including large technology companies such as Alphabet, Amazon, Microsoft and Meta.

By Thursday, however, the downturn had broadened considerably. Weakness spread beyond just those most exposed to AI infrastructure and pulled the rest of the US market lower. The broader US equity market fell by 4.4% on the day while the tech-heavy Nasdaq fell by more. 

While there are fundamental concerns explaining some of the weakness around AI companies, the speed and scale of the moves suggest technical factors may also be accelerating it. For example, the growth of leveraged ETFs linked to AI stocks, popular with retail investors, alongside overcrowded positioning from hedge funds and other investors can exacerbate market moves as positions need to be unwound quickly.

The weakness has also spread globally. Other tech-heavy regions, such as Asia Pacific and Japan have underperformed while the UK, with its low technology exposure, has held up better.

Importantly, the fundamental backdrop remains broadly supportive. Corporate earnings growth remains unusually strong, even outside of the technology sector, while economic growth is resilient (even the UK is outperforming expectations).

There has also been a more encouraging development for diversified investors: bonds are once again providing some protection when equities fall. US Treasury yields have declined by almost 50 basis points since the technology sell-off began in October, supporting government bond prices and helping to cushion some of the weakness in equity markets.

We remain comfortable with current portfolio positioning but continue to evaluate the situation as it develops further. Over the coming weeks, we are likely to see continued volatility, with markets driven more by sentiment, rather than fundamentals. Looking at it with a strategic lens, this AI-driven volatility acts as a useful reminder of the importance of investors being a strategic asset allocation ‘maker’ (to ensure they have regional, style and stock diversification), rather than just a ‘taker’ by naively accepting the market capitalisation index and its technology-heavy weightings. It also highlights the benefits of regular rebalancing, which allows investors to take profits from assets which have done well and redeploy them elsewhere across their portfolio. A key feature of our June rebalance, for example, was to take profits from Asia Pacific equites and fund managers which had done particularly well from them semiconductor rally and invest those profits elsewhere across the portfolio. 

Risk warning 

This article is for intermediaries to be used for information purposes only. It does not constitute an offer or solicitation to invest, it is not advice or a personal recommendation nor does it take into account the particular investment objectives, financial situation or needs of individual clients. Whilst HRIS uses reasonable efforts to obtain information from sources which it believes to be reliable, HRIS makes no representation that the information in this document is accurate, reliable or complete. 

The value of your investments and the income from them may go down as well as up and neither is guaranteed. Investors could get back less than they invested. Past performance is not a reliable indicator of future results. Changes in exchange rates and/or tax rates may have an adverse effect on the value of an investment.