For months, megacap tech shares powered US stocks to dizzying gains. The market’s engine is now starting to sputter.
The latest sign of trouble came from Apple Inc., where reports that China plans to expand a ban on the use of iPhones in some government agencies sent shares to the worst two-day drop in a month. Apple suppliers such as Qualcomm Inc. and Skyworks Solutions Inc. sank more than 7%, while Microsoft Corp. and Nvidia Corp. remained under pressure.
Excitement over AI and signs the Fed was nearing the end of its tightening cycle drove the Nasdaq 100 to a 39% gain in the first half of the year. But the backdrop has turned less friendly, with rising Treasury yields among the threats to the group’s sky-high valuations. The tech-heavy index is virtually flat so far in the third quarter after dropping 0.7% on Thursday. Apple fell 2.9% for a two-day slide of more than 6%.
A BofA analysis of second-quarter filings shows that a fifth of funds had more than 40% of their assets in the seven biggest tech names. The seven accounted for 29% of active funds’ weight in S&P 500 companies, 150 basis points higher than their weight in the index, according to Savita Subramanian, BofA’s head of US equity and quantitative strategy.
Valuations also leave little room for error. The Nasdaq 100 trades at 24 times estimated earnings, above its 10-year average of 21, while Apple, Microsoft, and Nvidia all trade at premiums to both their own history and the market overall. “When the largest company is facing restrictions in a major economy, that is a giant headwind, and it should force investors to reassess valuations,” said Steve Sosnick, chief strategist at Interactive Brokers.
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