Market Reaction to Tech Stock Decline
Finance professor Jeremy Siegel discussed the recent downturn in the technology sector, attributing it to standard reactions following sharp rises in stock prices. He expressed optimism, noting that such declines usually don’t indicate the start of a long-term correction. “One of the oldest sayings on Wall Street is take the stairs up, take the elevator down, and that’s precisely what happened,” Siegel mentioned during an appearance on CNBC’s “Closing Bell.” He’s the chief economist at WisdomTree and a professor emeritus of finance at the Wharton School of Business.
Recently, the average prices of the major stock indexes took a hit, with the Nasdaq experiencing a 4.7% drop, marking its worst weekly performance since early April. Nevertheless, the Nasdaq is still up 10.6% this year. Siegel pointed out that semiconductor stocks have performed remarkably well, with the VanEck Semiconductor ETF rising 58% year-to-date, despite the overall market decline. However, it dropped by 5% this week alone. Friday’s decline of 9.2% for the iShares Semiconductor ETF was its worst single-day movement since late January, although it’s still up over 79% for the year.
While discussing sudden market shifts, Siegel remarked that such movements were not uncommon. “It can create a temporary ceiling, but it’s usually quite short-lived. Prices fall and then attempt to rise again,” he noted. This fluctuation can either lead to a breakout beyond previous highs or signal an onset of a more considerable drop, he cautioned.
Siegel differentiated the recent market gains linked to artificial intelligence from prior market bubbles, citing the potential productivity boosts these advancements bring. He compared the societal impacts of AI to those of the industrial revolution, insisting, “This AI revolution and the so-called ‘Mag Seven’ are unlike anything we have seen.” However, the reasons for the Friday sell-off in chip stocks remained unclear. Although Broadcom’s inability to improve its AI chip outlook earlier that week dampened market sentiment, the scale of selling on Friday was more severe than expected following that news.
He also warned that significant price surges make sense only if companies can consistently enhance their profits. “You can only sustain price increases if profits keep rising. If these spikes are followed by declines, it raises concerns about over-inflation in these chip stocks,” Siegel advised, urging caution regarding temporary profitability spikes as chips are historically prone to cycles.
