Big tech investors brace for more volatility as sell-off turns violent

(Bloomberg) — For months, investors have faced a dilemma: pay a fortune for shares of tech giants that are trading at sky-high prices, or wait for a cheaper entry point and risk missing out on the biggest bull market of the year.

Those who chose to stay on the sidelines had a golden opportunity Monday to jump in on a rout that sent the Nasdaq 100 Index down 5.5%, extending a three-day decline into double digits. And while many bought shares of Nvidia Corp. and Apple Inc. at deep discounts from where they traded just days earlier, they were undoubtedly in the minority. Most were content to wait, unconvinced that the selloff was over.

“I’m waiting for a better buying opportunity,” said Dan Cook, chief strategy officer at Apex Trader Funding. “I want to see a signal that the pressure has eased off a bit.”

It was a sentiment echoed by many investors amid growing fears of a U.S. recession and concerns about big spending on artificial intelligence. While most said they were optimistic about the long term, few said they were jumping into the deep end of a sell-off.

“Unless another positive factor emerges, the path of least resistance may be down,” Cook added.

Where that boost will come from, however, remains unclear. Six of the so-called Magnificent Seven tech companies that have fueled most of this year’s gains have already reported earnings, leaving traders waiting for weeks before AI darling Nvidia reports on Aug. 28. What’s more, after last week’s Federal Reserve meeting, where policymakers remained muted, the next meeting won’t be until September.

Results so far have painted a mixed picture for the sector. Alphabet Inc., Amazon.com Inc. and Tesla Inc. fell on reports that highlighted concerns about issues including their growth prospects and spending plans. However, Meta Platforms Inc. and Apple rose after their results, while the group overall showed positive trends on earnings stability and demand, even as earnings growth is expected to slow in the second half of the year.

So far this season, 80% of the S&P 500 tech companies have beaten earnings expectations, although fewer than 60% have met them on revenue, according to data compiled by Bloomberg Intelligence. In the latest quarter, 90% beat earnings expectations, while 56% beat revenue expectations.

The Nasdaq 100 ended Monday down 3%, well below the 5.5% decline it had earlier in the session. But it was still its second-worst day of 2022 (the previous one was last month).

While buying on the dip helped soften the blow, much of the damage had been done. Even after recouping a decline that at one point sent Nvidia down 15%, the stock closed down 6.4%, wiping out $168 billion in market value amid reports that Blackwell’s upcoming chip would be delayed. Its shares are now down 26% from their June peak.

Apple fell 11% on Monday after Warren Buffett’s Berkshire Hathaway Inc. cut its stake in the iPhone maker by nearly half. The shares closed down 4.8%.

While the sell-off has depressed valuations across the board, they are far from bargain levels. The Nasdaq 100 is trading at 24 times forecast earnings for the next 12 months, according to data compiled by Bloomberg. While that’s down from 28 times a month ago, it’s still above the benchmark’s 10-year average of nearly 22. Nvidia is valued at 31 times estimated earnings, while Apple and Microsoft Corp. are trading at around 29 times.

“Valuations aren’t flashy cheap, but they’re defensible,” said John Belton, a portfolio manager at Gabelli Funds. “A lot of the big tech companies are showing really strong growth, margin expansion, above-average earnings growth. They still deserve pretty healthy multiples, especially if we get into a more normalized interest rate environment.”

This year’s earnings season has shown that while profits remain strong for big tech companies, investors are increasingly skeptical about the big spending on AI computing infrastructure and are wondering when those investments will start to pay off.

Despite Monday’s carnage, there were some bright spots. Advanced Micro Devices Inc. rose 1.8% amid bets that it was poised to benefit from a potential setback for Nvidia. Chipmakers including ASML Holding NV and Lam Research Corp. also rose.

“The market could still be very volatile, but you know, those six, seven or eight things that make up this perfect storm, maybe a few of them will go away and investors will get back into the game,” said Ken Mahoney, CEO of Mahoney Asset Management.

–With assistance from Carmen Reinicke.

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