Megacap stock selloff shows investor concerns about too much tech

Wall Street's vulnerability to Big Tech weakness sparks market selloff, raising concerns about over-stretched stocks and earnings optimism.

A tumble in the heavyweight stocks that have powered markets higher this year is highlighting Wall Street's vulnerability to any weakness in the Big Tech trade and causing concerns that over-stretched stocks are in for more turbulence.

Disappointing quarterly reports from Tesla and Google-parent Alphabet sparked a crushing market selloff on Wednesday, with the tech-heavy Nasdaq Composite falling 3.6% in its worst day since October 2022. The benchmark S&P 500 slumped 2.3%, with the earnings reports causing concerns about upcoming results from the other big tech firms.

"This was the hair trigger for people saying, 'Wow, I've got way too much exposure to information technology and growthier type companies,'" said Thomas Martin, senior portfolio manager at GLOBALT, about Tesla's results, after the electric vehicle automaker posted its lowest quarterly profit margin in five years. "The trade ... is to get more diversified."

The rout comes after optimism about artificial intelligence technology fueled a months-long rally in a handful of massive technology and growth companies including chipmaker Nvidia , Microsoft and Amazon, pushing the S&P 500 to record highs this year.

The megacap stocks - dubbed, with Meta Platforms and Apple, the Magnificent Seven - have accounted for around a third of the S&P 500's 14% gain in 2024, making their trajectories a key factor in how broader markets will perform.

As share prices soared, concerns grew over companies' stretched valuations and comparisons to the dotcom bubble of more than two decades ago became more frequent. The S&P 500 is trading near 22 times expected earnings, its highest in over two years, and well above its 10-year average of 18, according to LSEG data.

Signs of nervousness around tech stocks began to creep up in recent weeks, as the blistering rally in many of the market leaders seemed to run out of gas. One signal came from the rise in the Cboe Volatility Index, known as Wall Street's fear gauge because it measures demand for portfolio protection. The measure shot to its highest level in three months on Wednesday.