Key Takeaways
- Tech stocks have come under pressure in recent weeks, weighed on by concerns about an AI bubble after a strong rally off April lows.
- Many analysts on Friday were saying they expect the rally will regain its footing, with some pointing to Nvidia’s earnings report next Wednesday as a possible catalyst.
Tech stocks have at times appeared unstoppable this year. Now they’re in a rut.
The tech-heavy Nasdaq Composite soared nearly 60% between April 8, when tariff uncertainty was at its highest, and Oct. 29, the index’s most recent record high. Those gains were driven mostly by the AI trade, which encompasses a variety of stocks across the technology, utilities, and industrials sectors, all of which are seen as beneficiaries of Big Tech’s behemoth AI investments.
Lately, some investors have become concerned about the size of those investments, as well as when and how handsomely they’ll pay off, though not everybody is convinced that AI stocks are in a bubble. Skeptics of that narrative list Big Tech’s hugely profitable businesses, the Fed’s recent rate cuts, and the efficiency gains AI is expected to deliver as reasons to remain optimistic.
Why This Is Significant
AI optimism has been the driving force behind most of the stock market’s gains over the past three years. Tech stocks have soared and come to account for a sizable portion of major stock indexes, making their performance vital to that of the broader market.
Nonetheless, the debate has chipped away at the overwhelmingly bullish sentiment that prevailed most of this year. Here’s what a selection of experts have to say about the slump and what it means for markets looking toward the end of the year.
Reading between the lines, many market watchers believe there’s still life in the rally — though many offer degrees of caution, citing among other things a need to be choosy with tech stocks; the likelihood of more profit taking with stocks near highs; and the need to continue to keep an eye on earnings.
What Experts Are Saying About the AI Pullback
Dan Ives, Managing Director and Senior Equity Research Analyst at Wedbush Securities: “In a nutshell, we view this as a short lived mini panic moment for tech stocks…. We believe Nvidia’s earnings next week will be another major validation moment for the AI Revolution and be a positive catalyst for tech stocks into year-end as investors continue to underestimate the scale and scope of AI spend.”
Jamie Cox, Managing Partner for Harris Financial Group: “For the vast majority of big-cap tech, the conditions for a 1990s-style tech bubble are not yet present. Markets need a Global Crossing moment, where the major private AI players hit the IPO markets, before we can start talking about equity market bubbles. For me, this is a good way to pick up the highest quality tech names on the cheap.”
Thomas Lee, Managing Director and Head of Research at Fundstrat Global Advisors: “We should expect, from time to time, profit taking, because tech has been a leader for the last decade and it is overbought… But to me, the underlying story driving technology, which is the productivity miracle coming from AI, is still intact.”
Eric Teal, Chief Investment Officer for Comerica Wealth Management: “Given the retail nature of the momentum-fueled recovery since April, we believe the buy on the dip mentality is in place until there is an earnings or profit margin erosion among the AI stocks… Nevertheless, the controversy surrounding the AI stocks is building, and valuations are 45% above the forward earnings multiple for the rest of the market, suggesting a need for caution at this juncture.”
Ross Mayfield, Investment Strategist at Baird, on what it would mean for investors to rotate out of tech into lower-risk stocks: “I think it’s incredibly healthy, both on the earnings front and on the price front, that you’re seeing some breadth, especially at a time when the question about the broader economy outside of AI is, ‘How healthy is it?’ So this is a really good sign to me, and I’m happy to take a little bit of gains from tech and rotate into some nascent leadership there in other sectors.”
Mark Smith, Senior Vice President & Portfolio Manager at Wells Fargo Advisors: “[I’m] not frightened at all. The numbers are dictating that you shouldn’t be. Eighty-three percent of S&P 500 names beat their earnings in the last earnings season, so nothing to be frightened about there. If you’re gonna have a serious correction here, those numbers have got to change.”
Aaron Schaechterle, Equities Portfolio Manager at Janus Henderson: “The impact of AI is real, and the demand for power is significant. We are choosing to selectively participate in these themes, by focusing on companies with proven business models, durable revenue and free cash flow generation.”
