Investors dump tech stocks ahead of Trump’s Wednesday tariff deadline
Nasdaq 100 down 7% in four days, big tech down 10%.
Hedge funds are driving the sell-off in tech stocks amid concerns about valuations and earnings.
Investors dumped tech stocks ahead of President Trump’s tariff deadline on Wednesday.
The Nasdaq 100 is down 7% in just four trading days, but big tech giants have been hit even harder, with an equal-weighted basket of the “Big Seven” stocks down about 10% since last Tuesday.
Hedge Funds Evade Risk Amid Weakening Momentum
The rapid price decline points to a broad weakening of Wall Street’s momentum trade as investors sell risk amid growing economic uncertainty that will culminate on April 2, when Trump is expected to unveil a long list of new tariffs.
For investors, the easiest way to get out of risk is to sell some of their biggest holdings, and large-cap technology stocks have dominated in recent years.
While the tech sector has been limited by tariffs, underperforming sectors have proven more vulnerable to the trade war.
Over the past week, consumer discretionary stocks fell 5%, industrials fell 3% and consumer staples rose 3%.
The heavy selling in tech stocks was driven by hedge funds, which reduced their holdings of tech stocks at the fastest pace in six months, according to data from Goldman Sachs’ trading desk.
The decline in the nominal value of tech stocks was the second-largest in the past five years, and some of the selling was related to new short positions, the bank said.
Risks include overvaluation, earnings decline
While the tech sector may be limited in its impact from Trump’s tariffs, the tariffs themselves could wake investors up to other risks in the sector.
These include overvaluation, potential rate hikes if inflation accelerates, and concerns about falling earnings if the economy slows.
The tech sector trades at 25 times forward earnings, well above the S&P 500’s 20.5 times, according to Factset.
Brent Thill, an equity analyst at Jefferies, said the government’s rate cuts also pose a threat to the sector, with Accenture the latest firm to highlight the headwinds they pose to the sector.
Thill cut his price targets on five software stocks on Monday. Microsoft was cut to $500 from $550, Amazon to $250 from $275, Meta Platforms to $725 from $810, Alphabet to $200 from $235, and Snowflake to $190 from $220.
Thiel said macroeconomic uncertainty is pausing deal flow in the tech sector and could also lead to a slowdown in advertising spending.
“Obviously there’s a lot of concern about DOGE and a lot of companies have said they’re seeing an uncertain environment, including Accenture, Lulu and FedEx, so we think those deals could be pushed back to the second half of the year,” Thiel told CNBC on Monday.
AI still needs to generate revenue and profits
Till said most of his clients are in “wait-and-see mode” when buying software stocks because profits from AI have yet to be realized.
“We have to see ROI on these initial investments,” Thiel said, adding that future spending on AI could stagnate until profits are realized.
“We have to see growth in AI revenues, and right now AI is only 1% to 3% of total software industry revenues, which is a very small percentage,” Thiel said.
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