Technology stocks, which had been the market’s best performers this year, had a second straight day of big losses on Monday.
The sudden decline in tech shares has caught the attention of Wall Street, as stocks like Facebook, Apple, Netflix, Amazon and Google parent Alphabet had been leading the U.S. stock market higher. The so-called “FAANG” stocks are also among the most widely owned by professional investors. Fund managers have been “doubling down” on tech, and now have a “record” amount of cash in the sector — which Wall Street dubs an “overweight” — relative to other sectors, according to Bank of America Merrill Lynch data.
So any signs of weakness in these popular investments raises red flags.
Leading the decline Monday was Apple, which suffered a ratings downgrade from Mizuho Securities, its second such downgrade in the past week.
Apple shares, which suffered their biggest loss of the year Friday when they tumbled nearly 4%, were down another 2.7% to $144.93. Today’s drop follows Mizuho cutting its rating on Apple to “neutral” from “buy” and cutting its price target to $150 from $160.
The two-day tech selloff, however, follows big gains. The tech-packed Nasdaq composite, for example, had been up 17.4% before Friday’s selloff, which was double the return of the broad Standard & Poor’s 500 stock index. And the “FAANG” stocks were up nearly 30% through the end of May, compared with a gain of 8% for the S&P 500, BofA data show. All the FAANG stocks fell 3% or more Friday and were all trading lower again Monday.
The decline has raised questions as to whether tech’s big run is over.
“It felt like someone took a pin and popped the balloon,” said Gary Kaltbaum, president of Kaltbaum Capital Management, referring to Friday’s tech downdraft.
Still, he cautions that tech had been going up pretty much in a straight line all year and was due for a pause.
It is too early, said Kaltbaum, to determine if the recent tech weakness will spell trouble for the broader U.S. stock market, which hasn’t suffered a 10%-plus drop since early 2016.
“Often, when the big leaders top out it is bad for the market,” he said. “But I’m not so sure right now. The jury is still out.”
One good sign for the overall market, at least so far, is that the pain in the tech sector hasn’t really spread to other areas. On Friday, for example, the blue-chip Dow Jones industrial average rallied to a new closing high, as did the small-company Russell 2000 stock index.
Similarly, in early trading Monday, the Nasdaq had pared its steep loss of 1.6% down to 0.6%, while the Dow and S&P 500 are both down a modest 0.2%.
While money is coming out of tech stocks that have performed well and have gotten expensive relative to earnings, the money is not leaving the market. Instead, it is moving to other areas deemed as offering more value, such as financial and energy shares, says Jack Ablin, chief investment officer at BMO Private Bank.
This shift of money from one sector to another is referred to as market “rotation,” which is less negative than investors fleeing all stocks.
“Rotation means investors are keeping so-called risk assets in play, they are not running away from risk,” says Ablin, adding that many might simply be taking “money off the table” and taking profits after big gains in tech.
Friday’s selloff was sparked, in part, due to a cautious research note from Goldman Sachs. The note argued that investors were treating tech stocks more like defensive companies that sell everyday staples like toilet paper and soda. Goldman’s fear was that treating tech like less volatile names would draw more money into the sector, making it vulnerable to price declines if those money flows start to “reverse.”