Nasdaq 100 Enters Correction Territory Amid AI Stock Sell-Off

Amazon (AMZN) leads stocks lower as traders turn skittish on AI bets. The prospect of rate cuts should boost demand for riskier stocks.

The violent rotation from Big Tech plunged the Nasdaq 100 Index into correction territory, wiping out more than $2 trillion in value in just over three weeks, as traders unwound bets that had been minting money for over a year.

The index was down 2.2% in midday trading on Friday, taking its loss since hitting a record on July 10 past 10%. If that holds through the end of the session, it will meet the definition of correction. The index remains up nearly 10% for the year. Several megacaps have seen concentrated selling, with both Nvidia Corp. (NVDA) and Tesla Inc. (TSLA) down more than 20% from recent highs, putting them in bear-market territory. Meanwhile, Microsoft Corp. (MSFT) and Amazon.com Inc. have each lost more than 10%. However, with the exception of Tesla, all remain higher for the year.

Amazon and Intel Corp. (INTC)  were among the biggest decliners. Amazon fell nearly 9% on Friday on heavy AI spending plans, while Intel plummeted 27% on a grim forecast. Red flags have been waving for the better part of the year, whether it is that tech stocks are too expensive, AI-fueled gains are overdone, or the market is too concentrated. With some high-profile earnings disappointments cementing those views, investors are now heeding those warnings, pocketing gains, and plowing into previous laggards, like utilities, which have been leading the market over the past two sessions.

Treasury yields are tumbling as traders bet on the Federal Reserve cutting interest rates at its next meeting in September. The Cboe NDX Volatility Index, which measures the 30-day implied swings in the Nasdaq 100 Index, briefly crossed 25, a level last seen in October 2023. Volatility indexes for Apple (APPL) and Amazon have also spiked of late. And the Cboe Volatility Index, or VIX, rose past the 20 threshold for the first time since October.

The rotation away from tech began in earnest after June inflation data showed cooling prices, stoking bets the Fed is ready to cut rates. The initial beneficiary was small-capitalization stocks, with the Russell 2000 rising about 4.5% since then, compared with the Nasdaq 100’s 3.8% decline.

The so-called Magnificent Seven megacap tech companies accounted for much of the S&P 500’s 14% first-half advance, with the cap-weighted index beating its equal-weight cousin by the most since 1999. Valuations soared, with the S&P 500’s information technology index seeing its highest price-to-earnings ratio since 2002.

The tech rout picked up steam after Alphabet Inc. unveiled capital expenses that topped estimates by $1 billion in its July 23 earnings report, owing mostly to outlays for artificial intelligence. That was enough for investors, who have grown wary of seeing unbridled spending with only distant prospects for higher revenue, to head for the exit. Microsoft joined Alphabet and Amazon with a signal of heavy spending on AI.

There have been some bright spots. Apple Inc. rose 2% on Friday, following a positive earnings report, and Meta Platforms Inc. rose earlier this week on its own results.