U.S. jobs data released last week showed that the jobs market was more resilient than had been expected amid surging global oil prices. When this data came out, there was a broad selloff in stock markets but AI stocks seemed to suffer the brunt of this selloff.
The Nasdaq shed 4.2%, the Dow Jones tumbled 1.3% while the S&P 500 lost 2.6%. This retreat triggered renewed concerns about whether or not the AI sector was in a bubble despite surging valuations of the leading players in this space. Investors were unsure whether mega-cap stocks were correctly priced at this time when chances of interest rate reductions were dwindling.
Several tech giants saw their stock prices taking major hits on Friday. Broadcom slipped by 7.49% while Nvidia shed 5.93%. This selloff also extended to tech stocks in Asia, with SK Hynix losing 4.1% and Samsung Electronics shedding 7.8%.
The Kospi index in South Korea lost 9%, an indication of the extent to which technology and chip exports dominate markets in the country. Each time demand for AI products falters, manufacturers of memory chips see their stocks tumble sharply. At the moment, major tech firms like Microsoft, Alphabet and Amazon have shifted to using their own in-house-made AI chips, which has dampened demand prospects for fabs in Asia, such as SK Hynix and Samsung.
For entities like Broadcom, profit margins are increasingly coming under scrutiny even if the company’s revenue has kept growing. Markets are jittery about the likely impact of heightened competition within the segment as this could pressure margins over the coming quarters and years.
For Nvidia, its unprecedented market cap valuation of around $5 trillion puts the company under the spotlight each time a market correction happens or sentiment shifts. This is because at such a high valuation, any slight shift in market direction is bound to have an outsized impact on the company’s stocks.
For tech optimists, Friday’s pullback presents a rare opportunity for investors to acquire blue-chip stocks during the dip so that they can ride any subsequent rally that builds up once the drivers behind the correction no longer carry as much weight. However, it is prudent for investors to avoid being carried away by recent price movements of stocks until the Federal Reserve pronounces itself more definitively regarding the path ahead for interest rates in the U.S.
In the meantime, investors could spend their time studying the fundamentals of tech giants like Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG) in order to form objective positions on whether the stocks of these companies should be kept under watch, bought or even sold.
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