Tech hit as rotation continues

There’s been a sharp sell-off in tech stocks today which saw the NASDAQ 100 drop over 2% soon after the open. Generative AI darlings NVIDIA and Super Micro Computers were both down over 5%, while there were also big losses for Meta, Apple, Microsoft and Tesla. Investors reacted to reports that the Biden administration was preparing further trade restrictions against China, focused on semiconductors. This follows a strong session on Tuesday which saw record closes for the Dow and S&P 500. The NASDAQ has lagged a touch ever since last Thursday when investors rotated out of the tech leaders and hoovered up many of the smaller, more domestically-focused companies which are constituents of the Russell 2000. The Dow also got some love as investors turned to some of the less fashionable US corporations which are constituents of the old school index, and seen as undervalued compared to market-leading tech. We saw a similar scene play out yesterday, with the tech-heavy NASDAQ up 0.2% while the Russell tacked on a healthy 3.5% and the Dow added 1.9%. How to explain? There’s no doubt that the Russell has lagged the other majors over the last few years, leading some analysts to question the foundations of the rally since last October. But while the index has yet to retake its all-time high from November 2021, it has jumped 12% in under a fortnight. This move, along with the modest pullback in tech, has helped to redress the valuation differential between the market leading stocks, and other overlooked areas of the US equity market. It is also felt that while tech companies are largely immune to high interest rates as they have little need to borrow, smaller companies should get an outsized boost if/when the Fed start to cut rates before the year-end. So what now? This rotation could proceed in an orderly fashion, and help to get valuations more balanced. But should the tech sector continue to sell off, this could lead to forced close-outs by margined players, triggering a more serious decline.