Authored by the Market Research Team at Jemy Finance, Jemy Trade
NEW YORK — The relentless rally in U.S. technology shares is showing significant signs of strain, as a potent combination of profit-taking, stretched valuations, and anxiety over the Federal Reserve’s next move spooks investors. The high-flying sector, which has been the market’s primary engine this year, is facing a sharp pullback, leading market participants to question if the artificial intelligence boom has gone too far, too fast.
The S&P 500 tech sector tumbled for a second straight session Wednesday, pushing its weekly decline to approximately 2.5%. The tech-heavy Nasdaq Composite has fared similarly, dropping about 2% over the same period. This downturn comes as investors move to de-risk their portfolios ahead of a looming, high-stakes speech by Federal Reserve Chair Jerome Powell at the Jackson Hole symposium.
“When you have overcrowding and you have had such strong performance, it doesn’t take much to see an unwind of that,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “Everyone is waiting for the Fed, and there is repositioning ahead of that.”
Has the AI Hype Peaked?
The recent selling pressure has been particularly harsh on the market’s AI darlings. Nvidia Corp, the semiconductor giant that has become the face of the AI trade, has seen its shares drop about 5% since last week. Palantir Technologies, an AI-focused data analytics firm, has been hit even harder, slumping some 16%.
This reversal follows a spectacular run-up. Since the market’s low point in April, the tech sector had soared over 50%, dwarfing the S&P 500’s broader 29% gain and pushing valuations to lofty levels. The tech sector’s price-to-earnings ratio recently hit 30 times forward earnings, its highest in a year, according to LSEG Datastream.
Cracks in the AI narrative are beginning to appear. A recent MIT study found that a staggering 95% of organizations are getting no return on their AI investments. Adding to the caution, OpenAI CEO Sam Altman commented last week that investors may be getting “overexcited” about artificial intelligence.
Despite the sharp correction, some believe the theme remains intact. “These are price corrections,” noted Andrew Almeida, director of investments at XYPN. “But if you look at the big picture, it’s clear that more people will be investing more dollars in AI infrastructure. This is certainly not a ‘reckoning’ with the AI theme.”
All Eyes on Jackson Hole
The market’s nervousness is amplified by the calendar. August and September are historically the worst-performing months for the S&P 500, creating a seasonally weak backdrop. “Valuations were stretched, these names have not taken a breather, and we’re going into a tougher season for stocks,” said King Lip, chief strategist at Baker Avenue Wealth Management.
Compounding the seasonal anxiety is Powell’s upcoming speech. Market expectations are sky-high, with Fed fund futures indicating an 84% probability of an interest rate cut at the Fed’s September meeting. Investors will be parsing Powell’s every word for confirmation. Any pushback against these dovish expectations could ignite significant market volatility, and high-valuation tech stocks are particularly vulnerable to the prospect of higher-for-longer interest rates.
Amid this uncertainty, there are signs of a potential market rotation. While tech has faltered, other sectors like consumer staples, healthcare, and financials were all positive for the week, suggesting investors may be broadening their focus beyond the mega-cap tech leaders.
“There are a lot of people who have overweighted tech, and it has worked for them,” said Chuck Carlson, CEO at Horizon Investment Services. “They don’t want to get caught on the wrong side of that if in fact, the Fed doesn’t do anything in September.” For now, investors seem to be trimming their exposure, not abandoning the trade, as they brace for the Fed’s crucial signal.
