There is massive rubble strewn about from a fresh rout in tech stocks. It’s unclear whether investors are yet willing to pick up perceived bargains within it or stay hunkered down, waiting for more bricks to crumble.
“The tech love-hate relationship continues. After leading the market higher, technology (tech) has fallen 10% from its peak as investors scrutinize AI capital spending, free cash flow, and the durability of earnings growth,” said Truist chief markets strategist Keith Lerner.
Lerner added that more downside risk to tech is “possible.”
The AI trading took a serious drubbing on Friday, with more than $1 trillion in market value wiped away as investors fretted about the weakening cash flow profiles of Big Tech amid aggressive AI spending. The news on the cash front worsened as the week went along.
Google (GOOG) showed negative free cash flow in the third quarter when it reported midweek. That was followed by another negative free cash flow call-out when Amazon (AMZN) reported Thursday evening.
A week ago, Meta (META) posted negative free cash flow for the first time since 2012.
None of these top tech names suggested that their AI spending would slow down. Quite the contrary.
Here are several charts from Lerner that show where the once-hot tech trade now stands.
Tech stocks vs. historical valuations
Tech stocks are trading below their 10-year average price-to-earnings (P/E) ratio.
Tech stock P/E ratio collapse
The PE ratio on tech stocks has fallen through a trapdoor amid a dialing back in earnings expectations.
History suggests more tech selling pressure
The selling in tech could continue if history is any guide.
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