Tech stocks slide toward weekly drop as AI rally hits speed bump

The global tech sector is experiencing its largest weekly decline in seven months, with the Nasdaq down 2.8%, as investors question the sustainability and profitability of the artificial intelligence rally, impacting major players like Softbank. This market sentiment is compounded by weaker-than-expected Chinese export data, which also weighed on Asian equities. Amidst these concerns, a flight to safety is evident, with U.S. Treasury yields falling and gold prices rising, partly due to signs of increasing U.S. job cuts.

Analysis

The global tech sector is experiencing a significant downturn, with the world's biggest tech index down 2.8% this week, marking its largest one-week drop since April. This decline is fueled by investor concerns over the sustainability and profitability of the artificial intelligence (AI) rally, despite the Nasdaq having gained over 50% since April. Specific examples include Meta (META.O) stock diving due to large AI-related capital expenditures and Palantir (PLTR.O) tumbling despite beating earnings forecasts, indicating a shift in market sentiment towards AI valuations.

This tech-led pullback is compounded by weaker-than-expected China trade data, with exports shrinking 1.1% in October, the worst performance since February. This economic signal negatively impacted Asian markets, with Japan's Nikkei falling 1.2% for a 4.1% weekly loss and South Korea's KOSPI down 1.8% for a 3.7% weekly decline. The broader STOXX 600 also edged down 0.17%, reflecting widespread market caution.

Amidst these market uncertainties, there is a clear flight to safety, evidenced by a rally in bond markets and rising gold prices. Benchmark 10-year U.S. Treasury yields fell 6.4 basis points to 4.09% following a surge in announced U.S. job cuts in October, as reported by Challenger, Gray & Christmas. Gold traded above $4,000 an ounce, further boosted by safe-haven demand and the ongoing government shutdown.

Key Decisions for Investors

• Investors should critically re-evaluate their exposure to AI-related stocks, considering the surfacing concerns about sustainability and profitability, especially for companies with high capital expenditure requirements like Meta.
• Closely monitor global economic indicators, particularly China's trade data and U.S. employment figures, as these are driving current market sentiment and influencing safe-haven flows.
• Given the current flight to safety, it may be prudent to consider increasing allocations to defensive assets such as U.S. Treasuries and gold, which are demonstrating resilience amidst market volatility.