The high-flying U.S. technology sector is experiencing a notable pullback, with investors citing concerns over overstretched valuations and overcrowded trades, particularly in artificial intelligence (AI)-focused stocks. The heavyweight S&P 500 tech sector fell sharply for a second consecutive session on Wednesday, bringing its weekly decline to approximately 2.5%. This sell-off has hit key AI beneficiaries particularly hard, with shares of Nvidia and Palantir Technologies coming under significant pressure.
This retreat follows a massive rally that saw the tech sector surge over 50% from the market’s low in April through last week, far outpacing the broader S&P 500. The run-up drove tech valuations to lofty levels, with the sector’s price-to-earnings ratio recently reaching about 30 times expected earnings, its highest in a year. Furthermore, the tech sector’s share of the overall S&P 500’s market value is nearing its highest point since the dot-com bubble era of 2000.
Investors are now looking to de-risk portfolios and lock in profits during a seasonally difficult period for stocks. The looming speech by Federal Reserve Chair Jerome Powell at the Jackson Hole symposium on Friday is also creating a cautious atmosphere. There is potential for increased volatility if his comments fail to align with growing market expectations for imminent interest rate cuts, which could further challenge high-valuation sectors.
According to Keith Lerner, co-chief investment officer at Truist Advisory Services, the sector’s strong performance and overcrowding make it vulnerable to a swift unwind. This sentiment reflects a growing wariness that the AI-driven gains, which have been a primary engine for the market’s record highs this year, may have been overdone in the short term, prompting a strategic repositioning away from the sector.
