A key stock market fault line buckled Friday as a group of momentum stocks that were fueling this year’s rally suddenly plunged.
So abrupt were the losses in companies from Facebook Inc. to Apple Inc. and Netflix Inc. to Nvidia Corp. that they pulled the Nasdaq 100 Index to its biggest decline relative to the Dow Jones Industrial Average since 2008. Accounts of what spurred it ranged from bearish tweets by a short seller to a cautious note from Goldman Sachs Group Inc.
The reversal on an otherwise placid day was violent enough to spur soul-searching in bulls after a rally that had added more than $500 billion to the market value of Apple, Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook in 2017. An index of momentum stocks last week completed its longest streak of daily gains since 1992.
“The question is whether sentiment is shifting for the long term or just a temporary setback,” said Bill Schultz, who oversees $1.2 billion as chief investment officer of McQueen, Ball & Associates Inc.
Losses were significant. Even as the Dow eked out an 87-point gain as of 4:02 p.m. in New York, the Nasdaq 100 slid 2.4 percent, trimming a decline that at one point reached 3.8 percent, the most in a year. The Philadelphia Stock Exchange Semiconductor Index slumped 4.2 percent and at one point was down 6.1 percent, the most since 2014.
Within the S&P 500, tech shares also trailed the full index by the most since 2008 as investors took profit in an industry whose gains this year through Thursday had almost tripled the S&P 500. Traders cited a rotation out of technology and into banks and energy, the biggest losers in 2017, driving up those groups up at least 1.9 percent.
Sentiment was shaken early in the day when Robert Boroujerdi, Goldman’s global chief investment officer, warned that low volatility in Facebook, Amazon, Apple, Microsoft and Alphabet may be blinding investors to their risks. Those include cyclicality, tech disruption and regulation, which could exacerbate downside volatility should market conditions change.
It didn’t help when Andrew Left of Citron Research tweeted about “frenzied casino action” in Nvidia. The Santa Clara, California-based chipmaker, up 50 percent year-to-date through yesterday, lost 6.5 percent and was earlier down almost 11 percent, the most since May 2011. It ended the day with the worst loss in the S&P 500.
Julian Emanuel, a strategist at UBS Group AG, was more optimistic. Despite the potential for a summer setback for technology shares, the long-term picture remains upbeat, Emanuel, who is overweight tech stocks, said in a note Friday. What could give investors pause is a surge in inflows, expanding multiples, he said.
Still, concern remains that the valuations of technology firms have gone too far. Amazon, Facebook, Apple have added at least 29 percent this year, compared with a 8.6 percent gain in the S&P 500. The Nasdaq 100 trades for 26 times annual earnings, the biggest gap to the S&P 500 since the end of 2015.
“People have focused too much on market-share gains of the largest names but have forgotten that technology is cyclical,” said Ilya Feygin, senior strategist at WallachBeth Capital. “Valuations in tech sector are too high. It has a long way to go in underperformance.”
For more on the global tech industry, check out the podcast: