As the Nasdaq Composite falls into a technical correction, Wall Street analysts warn that the broader U.S. stock market may face a more severe storm until technology leaders stabilize.
Amid market turbulence triggered by conflict in Iran, technology stocks are struggling to maintain their role as a "safe haven," which could pose significant trouble for the entire U.S. equity market.
During the bull market of the past three-plus years, technology and other mega-cap tech-related stocks have largely driven U.S. indices higher. Investors flocked to these large companies attracted by their strong profitability, solid balance sheets, and competitive business advantages.
However, this sector had already begun weakening in the weeks preceding the Middle East crisis, and since the conflict erupted one month ago, these stocks have accelerated their declines significantly.
Angelo Kourkafas, senior global investment strategist at Edward Jones, stated, "In this environment, all assets are under pressure, and technology stocks are no exception."
The weakness in technology stocks has become a defining feature of the challenging first quarter for U.S. stocks, which concludes this Tuesday. The benchmark S&P 500 index is heading toward its worst quarterly performance in approximately four years.
Since the outbreak of war, the technology sector within the S&P 500 has plummeted nearly 8%, largely mirroring the broader market's decline. Some mega-cap stocks, including Meta Platforms, Inc. and Alphabet, have suffered even steeper losses. The Nasdaq Composite Index, heavily weighted toward technology and related stocks, closed last week down more than 10% from its historic peak in October of last year, indicating it has entered a technical correction.
Profit-Taking, Sector-Specific Challenges, and Rising Yields
Analysts point to multiple factors contributing to the technology sector's struggles. As investors seek to manage equity risk, they may be taking profits on some of the biggest winners from the bull market, including highly liquid technology stocks.
Walter Todd, Chief Investment Officer at Greenwood Capital in South Carolina, noted, "They've had a great run for three years. Perhaps people are trying to reduce risk by trimming positions in the stocks that have made them the most money."
Inflation concerns stemming from the war have pushed U.S. Treasury yields higher, and rising yields typically pressure stock valuations. This impact is often most severe for technology stocks, which heavily rely on future expected profits to support their valuations.
A wave of sector-specific negative news is also weighing on share prices. Concerns that AI applications could disrupt existing businesses are troubling many companies. The massive spending by tech giants on data center expansion may be undermining their appeal as safe-haven assets. Just last week, Meta Platforms, Inc. and Alphabet lost a landmark lawsuit related to harms on social media platforms, introducing a new risk factor for the industry.
Matt Orton, Chief Market Strategist at Raymond James Investment Management, commented that when various headwinds "compound... it just makes it harder for investors to put money to work."
"Given the dominance and success of mega-cap stocks over the past few years, I think they have become the first and easiest source of liquidity for investors," Orton stated. "The confluence of these negative factors has created a significant headwind, making it difficult for mega-cap tech stocks, and the broader tech sector, to advance."
Due to their substantial historical gains, these technology stocks hold significant weight in key indices like the S&P 500 and Nasdaq. Despite recent pullbacks, the technology sector still comprises about one-third of the S&P 500 index.
As of last Friday, the "Magnificent Seven" tech stocks, including semiconductor giant NVIDIA, Apple, and Amazon, collectively represent roughly one-third of the S&P 500's total market capitalization. This "concentration risk" means these stocks will continue to heavily influence the broader market's direction.
Orton added, "Unless these large technology stocks can find stability in the market, it will be nearly impossible for the broader market to find a footing."
Remaining Appeal for Tech Stocks?
Overall, market expectations for the profit outlook of technology and mega-cap companies remain positive. According to LSEG IBES data, the technology sector is projected to achieve 43% earnings growth in 2026, compared to an expected 18.8% increase for the overall S&P 500.
King Lip, Chief Strategist at BakerAvenue Wealth Management, suggested that if high energy prices resulting from the Iran conflict broadly harm U.S. economic growth, the earnings resilience of tech stocks could be highly attractive.
"In a low-growth market environment, investors become extremely eager for earnings growth," Lip said.
The decline in tech stock prices has also made their valuations more appealing. Based on LSEG Datastream data, the technology sector's forward price-to-earnings ratio, using earnings projections for the next 12 months, has fallen to 20 times as of last Friday, down from 32 times in late October last year.
In comparison, the forward P/E for the overall S&P 500 is slightly lower at 19.3 times. The technology sector's P/E ratio risks falling below the broader market's valuation for the first time since 2017.
Some market leaders are already trading at lower multiples. Datastream data shows NVIDIA, a bellwether for the AI boom, now trading at a forward P/E just above 19 times, its lowest level since 2019. Meta Platforms, Inc. stock recently traded at a P/E of 17 times, a three-year low.
Chris Galipeau, Senior Market Strategist at Franklin Templeton, remarked, "The risk-reward profile is improving. As prices fall, the risk of holding them decreases."
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