US tech-stock stumble shows vulnerability in AI trade

NEW YORK: US technology shares are showing signs of vulnerability after a massive run, which has some investors pointing to overdone AI-driven gains while funds have taken steps to position away from the high-flying sector.
Investors are looking to de-risk portfolios or lock in profits during a seasonally difficult period for stocks. Friday's looming speech by Federal Reserve Chair Jerome Powell at the annual Jackson Hole symposium is creating caution, with potential volatility if his comments fail to meet growing market expectations that the central bank is poised to cut interest rates.
'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. 'At the same time this week, everyone is waiting for the Fed, and there is repositioning ahead of that.' The heavyweight S&P 500 tech sector fell sharply for a second consecutive session on Wednesday, putting its decline on the week at about 2.5%, while the tech-heavy Nasdaq Composite was off about 2% for the week. Shares of some highflyers, including Nvidia Corp and Palantir Technologies, were hit particularly hard.
The pullback comes after a huge rally in which the tech sector soared over 50% through last week since the market's low in April, topping the 29% gain of the broader S&P 500 and driving up valuations of tech stocks to lofty levels.
Investors cited wariness about the AI trade, which has been a key driver of tech stocks and the broader market as indexes have soared to record highs this year. Nvidia has gained about 30% YTD, while Palantir has roughly doubled. Tech’s P/E ratio recently reached about 30 times expected earnings for the next 12 months, near its highest in a year.
Recent cautionary signs included a study from MIT finding 95% of organisations see no return on AI investments, and OpenAI CEO Sam Altman warning of overexcitement about AI. Some AI-linked shares have already pulled back: Nvidia down about 5%, Palantir about 16%. In Europe, AI adopter stocks are under pressure amid concerns over disruption to the software sector.
“These are price corrections,' said Andrew Almeida, director of investments at XYPN. 'But more people will continue investing in AI infrastructure. This is not a reckoning with the AI theme.' Investors are also wary of August–September being a traditionally difficult period for equities. Powell's upcoming speech could trigger volatility if he pushes back on expectations for rate cuts. Tech’s high valuations make it sensitive to higher-than-expected interest rates.
— Reuters