Market’s speculative fringe is blasted as equity rout snowballs

The flight from risk taking place in U.S. equities has been painful for the tech giants who were last year’s big winners, but it pales in comparison to the walloping being doled out in the more speculative fringes of the market.

Take Reddit Inc., the social-media company whose shares more than quadrupled last year. It tumbled 20% on Monday, its worst day since going public last year. Retail favorites like Tesla Inc. and Palantir Inc. both sank more than 10%. Strategy Inc., which has turned into a proxy for Bitcoin, dropped 17% and Cathie Wood’s ARK Innovation exchange-traded fund declined 8.8%.

From artificial intelligence darlings to profitless technology companies, rising fears about a potential recession have sparked a flight from risk assets, hammering the momentum trade that just a few weeks ago was a money-printing machine for traders.

“There’s been a very big re-rating in growth expectations, and people are moving from risky low-quality stocks to high quality,” said Kevin Caron, senior portfolio manager at Washington Crossing Advisors. “At this point I find it hard to see how you get a floor.”

While some of these stocks bounced on Tuesday — Reddit rose 6.8% as the Nasdaq 100 added 0.2% — the turbulence underscores the dramatic reversal in the market’s understanding of the Trump administration, which had initially been expected to boost the economy. Trump’s election unleashed a wave of speculation on everything from cryptocurrencies to tech giants on bets that his administration would cut regulations and encourage investment.

Now, those wagers are being rapidly unwound as investors shift their attention to the way that some of the administration’s tactics, especially on tariffs, generate big uncertainty and could lead the country into a recession.

The threat of an economic downturn has weighed on the broader market, with the S&P 500 down nearly 9% from last month’s record high. But the brunt of the selloff has been borne by technology companies that had provided much of the fuel for the nearly two and a half-year-old bull market in US stocks. A Bloomberg index that tracks the Magnificent Seven stocks is down 16% since the S&P 500 closed at a record on Feb. 19.

The angst among traders was ramped up last week after President Trump warned that Americans may feel a “little disturbance” from his efforts to restructure the economy through tariffs, suggesting that the bleak economic signals, from rising unemployment to sticky inflation, might not be temporary.

With uncertainty about the economy on the rise, the carnage in speculative trades is mounting. Tesla, which rallied in the wake of Trump’s election win in November, has fallen more than 50% from a December peak. Michael Saylor’s Strategy, which has been transformed from an enterprise software company into a major Bitcoin holder, has dropped about 50% from a November high.

So-called zombie companies, where operating incomes couldn’t cover interest costs over the last 12 months, are getting pummeled. CryoPort Inc., one such company, tumbled 25% on Monday. SoundHound AI Inc. and Virgin Galactic Holdings Inc. each dropped 12% or more.

A basket of profitless tech companies tracked by Goldman Sachs has fallen 24% from a December high. Buy-now-pay-later company Affirm Holdings Inc., which hasn’t posted an annual profit since its debut in 2021, is down 43% since Feb. 18.

Even these drops, though, are smaller than the declines seen by the leveraged exchange traded funds tied to the most speculative stocks. A fund designed to deliver double the returns of Strategy has plunged 84% since its peak last fall, while a similar fund tied to Tesla has fallen 82% since its peak in December.

“What started as profit taking turned into the hot money leaving as we got this escalating anxiety about the growth situation and tariffs,” said Anthony Saglimbene, chief market strategist at Ameriprise. “It’s easier for people now to sell and await more certainty on the macro level from the sidelines.”

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With assistance from Subrat Patnaik and David Watkins.

Jeran Wittenstein and Ryan Vlastelica, Bloomberg News

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