Tech Stocks Lifted the Market This Year. Now They May Be Leading It Into a Correction

October 25, 2018, 12:23 AM UTC

It’s official. The Nasdaq Composite, a stock index heavily weighted toward big-name tech companies, is in a correction. That’s because some of the biggest names in tech are getting hit especially hard this month.

The Nadsaq fell 4.4% Wednesday as some tech companies warned about slowing demand. The drop was more severe that those in the Dow Jones Industrial Average and the S&P 500 Index—which fell 2.4% and 3.1%, respectively. Since reaching a record high on Aug. 29, the Nasdaq Composite has now fallen 12.4%.

Most stock-market observers consider a correction begins once a financial asset has lost at least 10% of its value. Bear markets begin once the losses surpass 20% from the high point. Some of the tech stocks celebrated the most in the past year are approaching a 20% decline from their 2018 peaks.

Netflix, for example, is down 19% from its peak price earlier this month. While the stock rallied after the company reported stronger-than-expected subscriber growth last quarter, the stock later declined amid concerns about how rising interest rates will affect its ability to borrow money needed to create future programming. Netflix fell 9.4% Wednesday.

Other big-ticket tech names also slid during Wednesday’s selloff. Amazon lost 5.9% of its value, while Apple fell 3.4%, Facebook 5.4% and Alphabet 4.8%. Chipmakers were hit especially hard, with AMD seeing its stock fall more than 9%, while Nvidia’s stock fell nearly 10%.

The drop in tech stocks Wednesday was fueled in part after two chipmakers, Texas Instruments and ST Microelectronics, warned about slowing demand. Because companies order semiconductors well in advance of anticipated demand, chipmaker stocks are sometimes seen as a harbinger of changes in market demand.

The question for tech investors is whether the declines are simply a correction, which can often presage a subsequent rally to new highs, or a road into a fully fledged bear market. Analysts seem to be leaning toward the latter, with much of the tech selling coming as investors rotate out of growth companies like Netflix and Amazon and into recession-proof stocks like utilities.

“Tech has been special for the last several years, the problem is tech has quietly stopped leading at the pace it was since the spring or summer,” Jim Paulsen, chief investment strategist at Leuthold Weeden, told Bloomberg. “It has increasingly lost more of that leadership and momentum itself. Growth has lost its leadership.”

Others took even a darker view. “Once a snowball like this starts, it doesn’t stop until it gets to the bottom of the hill,” Peter Tuz, president of Chase Investment Counsel, told Reuters. “And we don’t know if we’re at the bottom yet.”