Horror movies are nothing if not predictable. The warning signs start early… a creak on the stairs, a light that flickers, a door that wasn’t open a minute ago, and the characters explain each one away. Then, all at once, the plot turns and the horror unfolds. If you’ve been investing for any length of time, you’ve seen this movie before, and this was the week the plot turned.
On Thursday, Alphabet, the parent company of Google, had the worst day in its 22-year history as a public company, falling more than 12% and erasing close to half a trillion dollars in value in a single day. On Friday, Intel collapsed by nearly 30%, and other chip stocks fell across the board. The cast of the tech sector is getting picked off one by one.
The warning signs
The creaking noises started months ago, halfway around the world. China’s tech sector has been coming apart slowly for months, and last week it went into free fall. On October 22, the CSI 300, China’s equivalent of the S&P 500, officially entered a bear market, having lost roughly $3.5 trillion in value since its spring peak. The same day, Hong Kong’s Hang Seng Tech index dropped 5% to its lowest level in more than two years, leaving it down over 30% this year, with giants like Alibaba and Tencent leading the way down. The causes will sound familiar: Chinese tech companies have been pouring money into AI and the profits haven’t kept up.
In the US last week, Meta raised its AI spending plans yet again, proposed issuing new stock to help pay for it, and fell 7% in a day. The Nasdaq had its worst session since June. In hindsight, it was another flickering light.
Earnings week: the cast gets picked off
This was the week many of the biggest tech companies reported their quarterly results, and two stories show how quickly the mood turned.
Alphabet (Google). Search has always been Google’s bread and butter, the steady stream of advertising cash that pays for everything else they do, including their huge bet on AI. This quarter, search growth slowed to 12% from 17% a quarter earlier, missing expectations. At the same time, they spent a record $51.4 billion on data centers and equipment in a single quarter, double last year’s pace, and raised their spending plans for the year to as much as $205 billion. Picture a family whose main paycheck stops growing just as they break ground on a much bigger house.
Intel. This is a company that spent decades as the face of American chipmaking before falling behind its rivals and missing the AI boom. Last year the U.S. government took a roughly 10% stake to help rebuild it, and the stock had more than doubled in value this year. Then Intel announced this week that it expects the PC market to shrink 12% this year and 10% next. The PC market that Intel focuses on is ironically a casualty of the AI buildout. The cost of RAM is skyrocketing and driving up the cost of phones and PCs, resulting in decreased demand for the processors that Intel builds. The stock fell nearly 30% on Friday.
The monster in the house: a $700 billion spending spree
Alphabet, Amazon, Meta, and Microsoft are expected to spend roughly $700 billion this year, mostly on data centers and chips, and investors have begun punishing companies whose spending outpaces their revenue.
A growing share of that money is borrowed, and this is where interest rates come in. When interest rates rise, investors can earn higher yields on less risky Treasury bonds, so companies have to offer higher rates to attract lenders, and every dollar borrowed for a data center gets more expensive. The Fed held rates steady this week, but markets are now betting on a hike in December. Higher rates hurt tech stocks a second way too: when bonds in general are paying higher rates, investors are less willing to bet on the uncertainty of the stock market.
Caught in the crossfire
With the tech sector looking shaky, the chip stocks were the first to get caught in the crossfire. On Friday, AMD, Dell, and Arm fell between 8% and 13%, and even Nvidia, the undisputed king of the AI trade, slipped about 3%. The selloff spread overseas too, with Japanese chip equipment makers dragging Tokyo’s Nikkei index down more than 2%.
Meanwhile, this is all unfolding while Anthropic filed on Monday to go public in what’s expected to be the biggest IPO of the AI era. The offering has already been pushed back twice. OpenAI and a string of other AI companies have shelved their own listings, and after a week like this one, Anthropic may find a much tougher reception on Wall Street.
The rotation continues
Here’s the story of the week that won’t make the headlines. While tech was being torn apart, most of the stock market was doing just fine. On Thursday, while the Nasdaq-100 tumbled, more than 400 of the companies in the S&P 500 actually rose. Nine of the eleven sectors in the index were on track for a gain in October, and the Dow was on pace for a monthly gain even as the Nasdaq fell.
This is a continuation of the trend I wrote about a few weeks ago in “A Tale of Three Markets”: investors are rotating out of the crowded tech trade and into the rest of the market. The problem is that for many investors, tech makes up a huge chunk of their portfolios. This, once again, highlights the critical importance of diversification.
The bottom line
One of the scariest moments in any horror movie is the discovery that the call is coming from inside the house. For many investors, that’s exactly what happened this week. Plenty of people think they’re diversified because they bought an S&P 500 index fund and called it a day, but as I wrote back in July, the ten largest companies now make up more than 40% of that index. Proper diversification requires a lot more work.
The investors who will sleep well this Halloween didn’t have to predict the selloff. Almost nobody does. They were the ones with diversified portfolios that didn’t depend on a single story going right.
Disclosure
Convivia Financial LLC is a registered investment advisor. This article is for general informational purposes only and reflects the author’s opinions as of the date of publication, which are subject to change without notice. Nothing herein constitutes investment, legal, or tax advice, nor is it a recommendation, offer, or solicitation to buy, sell, or hold any security. All investing involves risk, including loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. Past performance does not guarantee future results. Information from third-party sources is believed reliable but has not been independently verified. As of the date of publication, the Firm and/or its associated persons do not hold positions in the securities discussed. Registration as an investment advisor does not imply any particular level of skill or training. For more information about the Firm, including fees and conflicts of interest, please refer to our Form ADV Part 2A available upon request.
