After soaring, tech loses steam again with questions about return

Investors in technology stocks can be an impatient bunch. But lately, they have been seriously irritated by the high price they paid to enter the AI market, without the increase in profits they expected.

The Nasdaq, a barometer of the technology sector, was about to fall another 1.2% on Friday (26), a knock-on effect from yet another massive sell-off in South Korea, whose Kospi index fell 5.8%. The Nasdaq ended every day this week in the red and fell more than 6% from its all-time high, recorded on June 2.

Investors are right to be cautious: AI stock valuations have been soaring for several years, based largely on the promise of the technology - not the net profit growth that drives share price increases for most companies.

It's not that demand for AI is falling - quite the opposite. But the sector's explosive growth has forced companies to spend and borrow tens of billions of dollars to build and develop the technology - with no immediate results to prove it.

It's not exactly the fault of big technology companies. AI has become an incredibly expensive endeavor. Rising demand for the technology has driven a boom in data centers, requiring enormous numbers of high-power chips that semiconductor companies can't produce quickly enough.

This has sent chip prices soaring, creating a kind of K-shaped AI sector, causing chipmaker stocks to soar - and the technology companies that power the AI models to sink.

Microsoft and Meta are in a bear market after losing a fifth of their value from their peaks. The rest of the so-called "Mag 7" tech giants - Amazon, Apple, Google, Nvidia and Tesla - are in a correction phase, with declines of at least 10% from recent highs.

To illustrate the "Tale of Two Cities of AI": Apple announced on Thursday that it would raise the prices of MacBooks and iPads due to memory shortages, causing its shares to plunge more than 6%.

Micron, a maker of memory and storage chips, rose almost 16% on Thursday after reporting excellent financial results the night before - due to a boom in demand for its semiconductors.

This market dynamic is giving the sector pause. OpenAI is considering delaying its initial public offering (IPO) due to recent market volatility, which could make it difficult for the company to reach its desired $1 trillion valuation, the New York Times reported on Thursday.

Kospi, which is halved in value by just two tech giants (SK Hynix and Samsung), tripped another circuit breaker on Friday, leading to a 20-minute trading halt.

The Kospi, which has risen around 90% this year, has been volatile for some time. But this week has been particularly turbulent - falling 10% on Tuesday, rising 5% and 3% on Wednesday and Thursday, and then plummeting again on Friday.

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The technology sector has been driving the stock market's rise in recent years. Despite its decline, the semiconductor industry more than made up the difference, now accounting for 19% of the value of the S&P 500.

However, rising bond yields and the possibility that the Federal Reserve will raise interest rates in the coming months could hurt the technology sector, which is particularly susceptible to the negative effects of high funding rates.

So if instability in the technology sector turns into a sell-off, the rest of the stock market will need to bear the brunt. The good news: All non-tech sectors are up this week.

And even with its dependence on the technology sector, the S&P 500 is just over 3% from its all-time high.

Meanwhile, tech stock traders are tiptoeing around traps, eager to get through June without losing a limb.

Source: CNN