With big tech – the "Magnificent Seven" – stocks at high levels, investors are becoming nervous that US economic momentum might be faltering. Despite some punchy US service sector figures yesterday, equities fell. Wealth managers gave their reactions.

Worries that the US economy is stumbling – and the elevated valuations of tech stocks – continued to haunt global equity markets yesterday, with major indices, such as the Dow Jones Industrial Average, falling sharply on Monday. Today (Tuesday 6 August), Japanese stocks rebounded, while US and European equity futures gained, however.

The Nasdaq Composite fell 2.5 per cent in early trade, the DJIA fell more than 2 per cent, as did the S&P 400. In Asia, Japan’s Nikkei 225 dropped by more than 12 per cent, the worst single-day slide since the Black Monday crash of 1987. The CBOE Volatility Index, aka VIX, rose to 41 at one stage yesterday, and was logged at 54 earlier yesterday before falling back on on robust services sector data. Equity indices in Germany, France and the UK were all in the red yesterday.

According to a variety of reports, tech shares have become vulnerable amid concerns that the US economy is losing momentum. The “Magnificent Seven” big tech companies, such as Nvidia and Apple, are vulnerable as investors unwind what have been popular trades. On Monday, shares in Apple, Meta and Nvidia fell by 3 per cent or more. 

Already, the market activity has kicked off speculation that the US Federal Reserve might cut rates sooner rather than later. 

“The strong ISM (Institute for Supply Management) report this morning highlights the challenge of focusing in on single data releases and more or less confirms this market volatility is mostly a global carry trade unwind and a re-evaluation of the AI hype,” Smigiel said. “We continue to see two to three 25 basis point cuts from the Fed for the remainder of 2024 yet we also expect long-term US rates to drift higher from this overshoot given what we see as firming short-term inflationary pressures.”

“The weekend did little to dampen volatility as the global sell-off accelerated this morning. Quite frankly, this sell-off is now overdone. Emergency Fed rate cuts being priced in makes little sense given the economic backdrop in the US and would only serve to destroy policymaker credibility,” Smigiel said. 

The high prices for big tech stocks made them vulnerable to market worries, according to Ben Barringer, technology analyst at Quilter Cheviot.

“When valuations are as high as they are for the big tech stocks, any blip is likely to cause shockwaves. Investors need to be prepared for this and be comfortable with the reason [why] they are investing in these stocks in the first place,” he said. 

One “blip” was chipmaker Nvidia reportedly telling Microsoft and at least one other cloud provider saying that its “Blackwell” B200 AI chips will take at least three months longer to produce than was planned. 

“The news out in the last week and over the weekend would point to a slight overreaction in the movement in tech stocks, with Nvidia’s delays with its Blackwell product flagged well in advance of this more formal announcement. While delays to new product lines are never ideal, Nvidia can still sell its current Hopper product,” Barringer said. 

“Apple, meanwhile, has seen Warren Buffett halve his stake in the company adding to the negative sentiment out there. Buffett has historically bought Apple with a valuation in the low 20s and sold it when it is in the low 30s. Apple is going through somewhat of a transition phase just now and while there are exciting developments in the pipeline (Apple Intelligence), these are not yet revenue generating, and this makes it vulnerable to extreme market movements,” he said. 

A larger worry for the tech sector, so analysts have said, is that demand affects sales and thus any slowdown will filter through to some of these tech giants. 

James Salter, chief investment officer and manager of the Zennor Japan Fund, reflected on the Japanese angle of the market sell-off.: “Having spent 35 years covering Japan, I am never surprised by the types of stock market falls we have witnessed in recent days. 

“We have been warning that a stronger yen currency would initially cause indices to fall. What has been more difficult to gauge is the extent of the yen carry trade. The Bank of Japan has raised interest rates to 0.25 per cent at a time when both the Federal Reserve and the Bank of England look to be moving towards an easing cycle. The yen has strengthened from over ¥160/$1 to a level below ¥150/$1.

“The Bank of Japan has clearly come under a lot of pressure regarding imported inflation and this newfound ‘hawkishness’ is somewhat precarious. It comes at a time when the US economy looks vulnerable to weaker employment and consumption, and a Chinese economy that has so far failed to bounce back. The recent stock market losers have included banks, insurance, autos and technology companies. These are all overcrowded trades that have seen foreigners pile into,” Salter said. 

“Our portfolio, however, remains very domestically orientated. We will nibble at some existing names that have pulled back but are cognisant that the deleveraging may have further to go,” Salter continued. 

“Our short-term concerns do not detract from our longer-term optimism on capital allocation change in Japan. We have been very aware of how cheap the yen is – and been positioned for it to strengthen structurally. It will take a little time for the market to adjust to what a stronger yen means for earnings,” Salter said. “It has felt to us that the market has been discounting some of the yen boosted earnings for some time. We do not expect this to have a radical impact on Japanese competitiveness or even earnings. We are having a market setback but nothing that changes our investment case for Japan based on a corporate governance revolution in Japan – just lower prices and better valuations.”