It’s been a tricky few weeks for the technology sector, after some early results suggested growth expectations may have gone too far.
- The Nasdaq is down almost 5% in the past two weeks – double the fall in the S&P 500
- The troubles at both TSMC and ASML appeared relatively trivial, but hit share prices hard
- It appears the market is no longer willing to afford companies high valuations simply on the basis of their label.
Is there a wobble in the technology sector? Recent results from ASML and TSMC have prompted some weakness among semiconductor companies, with even heavyweight Nvidia down over 15% since mid-March. This has dragged the Nasdaq lower: it is down almost 5% in the past two weeks – double the fall in the S&P 500. Could this finally be a reckoning?
The troubles at both TSMC and ASML appeared relatively trivial. TSMC beat market expectations on earnings as demand for AI applications increased . Its weakness came from lower forward guidance, as the group suggested long-term demand may be marginally behind previous forecasts. ASML saw lower orders than expected, but continued to guide analysts towards strong future growth .
In both cases shares sold off significantly. ASML dropped around 7% on the day, with TSMC dropping a little less. Their weakness was felt across the technology sector, and in the semiconductor complex in particular. With even minor negative news triggering a sell-off, it was a sign of how high expectations had become for many of these technology giants.
Tesla had already been subject to a similar effect. Its shares are down 35% since the start of the year after signs of slowing sales growth, greater competition from China and a round of lay-offs. Part of the problem was also that embedded expectations had got too high. As one of the exclusive club of the Magnificent Seven, its share price had outstripped its earnings prospects.
It appears that the market is no longer willing to afford companies high valuations simply on the basis of the label. Increasingly, companies are being judged on their results. If they are AI winners, it needs to be clear from their revenues. Technology won’t have a natural advantage just because it is technology.
This should be a better environment for active managers, as the market leadership broadens out. However, it is a more complicated environment for equity investors. Previously, the investors need look no further than an S&P 500 tracker or a US growth fund for exposure to fast-growing AI and other key trends. From here, markets are likely to be more discerning. Companies that have traded on their reputation rather than reality could be in for a rougher ride.
