Have you noticed how volatile the tech sector, particularly the Nasdaq 100, has been lately? It seems like one moment, it's soaring to new heights, and the next, it's plummeting into correction territory. This time, it appears that the darlings of artificial intelligence (AI) have played a significant role in this dramatic shift. 

What Happened to the Nasdaq 100?

The Nasdaq 100 Index, known for being heavily weighted with tech giants, has entered correction territory. This means it has fallen over 10% from its recent highs. To put this into perspective, more than $2 trillion in market value has been wiped out since July 10th. This drop has primarily been driven by a sharp rotation away from big tech stocks, including leading AI companies.

Key Factors Behind the Decline

So, what are the main reasons for this drastic downturn?

1. High Valuations: Tech stocks, especially those pioneering AI, had surged to extremely high valuations. Investors began questioning whether these lofty prices were justified.

2. Excessive AI Spending: Companies like Amazon, Microsoft, and Alphabet have ramped up spending on AI, putting pressure on their short-term earnings. This spooked investors, who are wary of large expenditures with only distant prospects for increased revenue.

3. Inflation Concerns: Reports of cooling inflation had previously pushed the stock market higher by bolstering hopes that the Federal Reserve might soon cut interest rates. However, this also led to a spike in volatility when some tech earnings failed to meet sky-high expectations.

Major Technology Companies Affected

Several tech giants have taken substantial hits, leading them into bear-market territory (defined as a fall of 20% or more from recent highs).

Nvidia Corp. and Tesla Inc.

Both Nvidia and Tesla have seen their stock prices plunge more than 20% from recent highs. This is significant, especially for Nvidia, a company that has stood at the forefront of AI and machine learning advancements.

Microsoft Corp. and Amazon.com Inc.

While not in bear territory, Microsoft and Amazon have each lost over 10% from recent highs. Amazon has been particularly impacted by its heavy spending on AI, which led to an 8.8% drop in its stock price in just one day. Similarly, Intel took a hit when it issued a grim forecast, causing its shares to plummet by 26%, marking the steepest one-day drop since 1982.

Why AI Spending is a Double-Edged Sword

Artificial intelligence holds tremendous promise for the future, but the road to get there is fraught with high costs and uncertainties. Companies are investing heavily in AI infrastructure, talent, and research. While this long-term investment is expected to pay off, it causes short-term pain when earnings are yet to catch up.

What Investors Are Saying

Investors like Bill Stone, Chief Investment Officer at Glenview Trust Co., indicate that while AI demand is promising, the timing and scale of returns remain uncertain. The market is reacting to this uncertainty by readjusting valuations and questioning whether current spending levels are sustainable.

Market Sentiment and Volatility

The Cboe NDX Volatility Index, which measures the 30-day implied swings in the Nasdaq 100, briefly spiked above 28, its highest since March 2023. Not only has Nasdaq experienced increased volatility, but indexes for specific companies like Apple and Amazon have also jumped. The widely-followed Cboe Volatility Index (VIX) is at its highest in over a year.

Volatility in Context

Volatility is a double-edged sword. While it indicates uncertainty and market risk, it also offers opportunities for savvy investors to buy at lower prices. However, the current spike has caught many by surprise, sending ripples through the investment community.

Shift Towards Defensive Sectors

As funds flow out of tech stocks, they are finding new homes in more defensive sectors. Utilities, often considered a safe haven, have started to lead the market over recent sessions. Treasury yields have also tumbled as traders bet on the Federal Reserve cutting interest rates at its next meeting in September.

Defensive Stocks in Focus

Investors are increasingly turning to sectors less correlated with high-risk tech investments. Whether it’s utilities, consumer staples, or healthcare, these areas offer more stable returns and less volatility.