Learn why the technology sector is facing a slowdown and what it could mean for future investments.
The tech sector is often volatile, and not always in an investor-friendly way.
Wall Street took a beating in recent weeks, with the S&P 500 (^GSPC -0.21%) index falling 8.5% from July 16 to Aug. 5. Over the same period, the tech-heavy Nasdaq 100 index recorded a 12.3% price drop. And the Vanguard Information Technology ETF (VGT -0.59%), which focuses on stocks in the tech sector, posted a 14.8% drop.
The plunge was led by some true heavyweights. Artificial intelligence (AI) chip designer Nvidia (NVDA -2.38%) posted a 20.5% price drop in that three-week period, for example. AI systems builder Super Micro Computer (SMCI -2.78%) — also known as Supermicro — took a 30.6% hit over the same period, and chipmaking veteran Intel (INTC -2.39%) suffered a 41.4% crash.
The market is already coming back from that dramatic dip, but the tech sector still lags behind the broader market. Let’s look at the driving forces behind this tech sector takedown and what it all means for investors.
1. Mixed earnings reports
The third earnings season of 2024 is already winding down, and it hasn’t always been kind to tech investors. Many trend-setting tech stocks either delivered disappointing results or set modest guidance goals for the back half of the year, often with price-cutting effects.
The list of market-moving earnings reports includes Supermicro and Intel. Both fell short of Wall Street’s consensus earnings targets and reported challenging potholes in the road ahead. Intel’s issues inspired a $10 billion cost-cutting program and hit the pause button on the company’s dividend program.
Management comments shed some light on what’s going on:
- “Second-half trends are more challenging than we previously expected,” Intel CEO Pat Gelsinger said, reflecting a tough economy. Hold that thought.
- Supermicro CEO Charles Liang noted that the company’s long-term investments in factories are holding back its bottom-line results. “We anticipate that the short-term margin pressure will ease and return to normal range before the end of fiscal year 2025,” he said.
- Arm Holdings (ARM -3.17%) chief financial officer Jason Child offered soft full-year revenue and margin guidance as, he said, “inventory issues in the industrial Internet of Things and networking markets seem to be more persistent than originally suggested.” In other words, outperformance in recent quarters led to overstuffed product pipelines and warehouses.
- In The Trade Desk‘s (TTD -0.05%) earnings call, CEO Jeff Green said that his ad-buying customers “are dealing with a lot of uncertainty.” Companies are doing well, but consumers hold on tightly to their families’ wallets, reducing the effectiveness of marketing messages. “That has significant implications on how companies market products, from pricing to packaging to advertising,” Green said.
There are some common threads among these analyses. Most of these guiding lights lead me back to…
2. …that darn economy
The inflation crisis in winding down, the Federal Reserve is planning to cut interest rates in September, and the overall economy is getting back on its feet.
But the economic crisis isn’t finished yet, and there’s still room for nervous investor reactions. Every suggestion that the rate cuts might be delayed causes another market dip. A slight rate increase in Japan unleashed another bearish market reaction around the world. Add the insights and worries voiced by business leaders in the last section, and this bull market starts to feel unstable.
That’s bad news for high-flying market darlings. It’s not great for up-and-coming innovators of the future, too — this looks like a problematic time to seek funding or go public. As a result, both established leaders and smaller upstarts are taking hits to their perceived market values.
3. Investors are losing patience with the stalled AI boom
Of course, the list of deep price drops includes many of the leading names in AI technology. Nvidia’s drop alone removed $637 billion of market value from the AI surge. That company didn’t even report results in July — its second-quarter update is scheduled for Aug. 28. Here, investors are applying lessons learned from sector peers to Nvidia’s situation.
And maybe — just maybe — market makers got a little too enthusiastic about the early AI boom.
Yes, generative AI is a game-changing technology, but there are questions hanging in the air. For instance:
- How quickly will that revolution lead to sustainable changes to business results in the AI sector? Nvidia’s early hardware lead could fade as other chip designers develop comparable hardware, perhaps at a lower cost or more efficient power and cooling solutions.
- OpenAI’s ChatGPT is the cat’s pajamas among large language models (LLMs) so far, but another engine could steal its title someday.
- And I have heard many business leaders fret about the industry-changing powers of generative AI, but there aren’t many real-world examples of that effect yet.
Some of these concerns might never materialize, and this could just be a short lull in the frantic pace of AI innovation. But perception quickly becomes a reality in the stock market, and every investor works with an incomplete set of information about the current and future state of affairs.
And on that note, my final section kind of writes itself.
4. Time to take some profits?
Despite the recent price drops, the market darlings of AI are still up by a lot. On Aug. 5, at the very bottom of the brief panic, Nvidia and Supermicro shares had still more than doubled year to date. Arm Holdings held a 47% gain on that date.
I can’t blame worried investors for converting some paper gains into cash profits under those circumstances. The resulting price cuts made the same stocks a little more affordable for the next wave of bullish AI investors, and the beat goes on.
In the end, the recent drop in tech stocks boiled down to the usual market noise. Opportunistic investors should keep an eye out for this type of short-lived buying opportunity, with the obvious caveat that the next downward move might have staying power. Nobody really knows until it happens.
Until then, it’s best to take a calm look at the current market and rearrange your portfolio to fit your long-term views. Personally, I’m a little worried about Nvidia’s grip on the hardware crown while Intel and The Trade Desk look undervalued today. Your mileage may vary, but feel free to start your next stock-picking research binge right there.
Anders Bylund has positions in Intel, Nvidia, The Trade Desk, and Vanguard World Fund-Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Nvidia and The Trade Desk. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
