U.S. tech shares showing vulnerability after massive run

Investors cited wariness about the AI trade, which has been a key driver of tech stocks and the wider market as indexes have surged to record highs this year

U.S. technology shares are showing signs of vulnerability after a massive run, which has some investors pointing to overdone AI-driven gains while funds have taken steps to position away from the sector.

Investors are looking to de-risk portfolios or lock in profits during a seasonally difficult period for stocks.

When you have overcrowding and you have had such strong performance, it doesn’t take much to see an unwind of that, said Keith Lerner, co-chief investment officer at Truist Advisory Services. At the same time this week, everyone is waiting for the Fed, and there is repositioning ahead of that.

The S&P 500 tech sector dropped sharply for a second consecutive session on Wednesday, putting its decline on the week at around 2.5%, while the tech-heavy Nasdaq Composite was off nearly 2% for the week.

The pullback comes after a huge rally in which the tech sector surged more than 50% through last week since the market’s low for the year in April. That easily topped the 29% gain of the broader S&P 500 during that period and drove up valuations of tech stocks to high levels.

Investors cited wariness about the AI trade, which has been a key driver of tech stocks and the wider market as indexes have surged to record highs this year.

Indeed, the tech sector’s price-to-earnings ratio recently reached about 30 times expected earnings for the next 12 months, its highest level in a year, according to LSEG Datastream, while tech’s share of the overall S&P 500’s market value is nearly its highest since 2000.

Recent cautionary signs included a study from researchers at the Massachusetts Institute of Technology that found that 95% of organizations are getting no return on AI investments, as well as comments by OpenAI CEO Sam Altman, who told the Verge last week that investors may be getting overexcited about AI.