The Dow Plunged 354 Points as Tech Stocks Crashed. Is This the End of the Rally?

It took until Thursday of the second week of earnings season, but predictions that tech would run into trouble when it came time to report appear to be coming true. Just look at Nvidia’s release. It wasn’t that there was anything wrong with Nvidia’s (NVDA) numbers— it reported a profit of $1.34 a share on sales of $26.66 billion, topping the consensus for a profit of $1.26 a share on revenue of $26.4 billion. But there wasn’t anything really right about them either, and that’s not good news for a stock that was up 180% this year and traded at more than 100 times earnings. And that made every tiny disappointment, from slower data center growth to narrower margins look like a big deal. Nvidia stock fell 4.3%.



And it wasn’t just Nvidia that was tumbling today. Tesla (TSLA) fell 5% despite reporting its fourth straight quarterly profit; Amazon.com (AMZN) slumped 3.7% after Goldman Sachs said its recent stock performance was unsustainable; and Meta Platforms (FB) fell 2.5% after reporting a decline in user engagement. The market, at last, appears to recognize just how out of whack the market for growth stocks has gotten. As a result, the Nasdaq Composite slumped 2.3%, while the Dow Jones Industrial Average dropped 1.3%, and the S&P 500 fell 1.2%.

Despite appearances, it wasn’t a slaughter out there. Some 222 S&P 500 stocks finished the day higher versus 282 that finished it lower. But companies like Whirlpool (WHR), which gained 8% after earnings, United Airlines (UAL), which rose 4.9%, and PulteGroup (PHM), which rose 4.7% after its own earnings report, are too small to make up for it when big tech gets whacked.



Goldman Sachs warned of such a scenario in a note published Wednesday. In it, strategist David Kostin noted that the five big tech stocks—Apple, Amazon, Microsoft, Facebook, and Alphabet—account for 22% of the S&P 500’s market cap and trade at 31 times earnings, a 70% premium to the rest of the S&P 500. That valuation premium is deserved, Kostin says, but the fact that everyone owns them creates big risks. “From a macro perspective, record concentration means the S&P 500 has never been more dependent on the continued strength of its largest constituents or more vulnerable to an idiosyncratic shock to any of these stocks,” Kostin writes. “From a micro perspective, elevated multiples, a rapidly-shifting macroeconomic backdrop, portfolio weight limits, crowding, and potential regulation represent the key risks to the future absolute and relative returns of today’s market leaders.”

But is the tech rally really over? In this past weekend’s Trader column, we noted that a similar dynamic played out last earnings season. Tech “disappointed” while other sectors were able to jump over a very low bar. Once earnings season was finished, tech took off again. “It’s a healthy pullback in growth that could result in a very choppy range bound SPX through August into September that should take some of the heat out from under growth,” writes Fundstrat’s Robert Sluymer. Then again, the market has come a long way since then. Maybe this time will be different after all.