Important points
- Tech stocks experienced a turbulent week, dropping significantly on Thursday and then bouncing back on Friday, with some previously lagging stocks showing signs of recovery.
- There’s a growing concern among investors about the speed of corporate borrowing to fund AI expansions, even if no single piece of news seems to pinpoint a cause for these fluctuations.
- Despite the noise from the past week, U.S. stocks have risen by 15% since the year’s beginning.
Stock prices have had quite a rollercoaster this week, particularly in the tech sector. The Morningstar U.S. Technology Index saw a rise of over 2.5% on Monday, but that momentum was short-lived. By Thursday, tech stocks dipped 2.43%, only to recover a bit on Friday, ending the week up by 0.20%.
The Morningstar US Market Index faced a weekly loss as volatility in tech weighed down the overall market, although gains in healthcare and energy sectors offered some balance. This situation underscores the concentration risk that many on Wall Street have been worried about for a while now.
“When the tech sector hits a rough patch, it significantly influences the market indexes that we closely track,” remarked Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth. “We’ve been advising people about this for some time.”
Simultaneously, some stocks that had been struggling recently are showing strong gains as tech faces challenges. The healthcare sector rose by 3.60%, while energy stocks gained 2.53% over the week.
Consumer cyclicals, however, underperformed, recording a loss of 2.60%. So, despite several days of fluctuation, tech stocks ended up mostly flat by week’s close.
What caused the market selloff?
As has been the case lately, there wasn’t any significant market news this week. “It’s tough to dissect each week on its own,” said Pappalardo, especially since the market reached an all-time high in late October.
In the background, the ongoing government shutdown was the longest in history, and its resolution seemed imminent when the market opened on Monday. There was also a significant reevaluation of the likelihood of a December interest rate cut by the Fed, which shifted from nearly certain to about 50% in just a few weeks due to mixed signals from Fed officials and muddled government employment and inflation statistics.
Pappalardo mentioned that while a month’s worth of data missing isn’t likely to dramatically shift things alone, such disruptions could contribute to future market impacts. He suggested that the Fed may hold off on cutting rates in December.
Additionally, the standard process of rebalancing by major funds and institutional investors likely played a role in this week’s market movements. “Many funds and managers prefer not to wait until year-end to make changes to their allocations,” he noted.
Tech stocks led the decline
This week, the biggest headlines surrounded the tech industry, with worries that AI companies, which have been driving the market’s rally, might fall short of investors’ high expectations for earnings and growth.
These concerns linger despite strong third-quarter earnings, with analysts observing that the demand for the infrastructure powering AI applications continues strongly.
Growing apprehension about significant borrowing by tech firms to fund these AI infrastructure projects might be affecting investor confidence. “This isn’t entirely new news, but it has heightened lately, and there’s often a cumulative effect,” Pappalardo explained. As debt levels rise, the margin for these companies to satisfy investor expectations shrinks.
Final point for investors
After a challenging trading week, Pappalardo advised investors to take a step back. With only six weeks remaining in the year, the U.S. stock market still stands 15% ahead of where it started, almost double the typical annual return. “It’s been a solid year,” he mentioned. “It’s reasonable for things to stabilize a bit now.”
Douglas Porter, chief economist at BMO Capital Markets, shared similar thoughts. “We must consider market volatility,” he noted in a research update on Friday. “For now, this seems primarily a tech issue, with the Nasdaq down about 4% from its late October peaks, but still up nearly 20% year-over-year.”
Overall, strategists believe the underlying factors that propelled stocks this year remain intact. “With potential for further Fed rate cuts and strong earnings from tech companies, we maintain that the equity bull market is still alive,” stated Ulrike Hoffman Burchardi, global head of equities at UBS Global Wealth Management, in a note to clients on Friday.
