Tech Rally Shows Signs of Losing Steam -- WSJ

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By Hannah Erin Lang and Bradley Olson

The prospect of lower interest rates is boosting many parts of the market: real-estate firms, banks, manufacturers. The outlook for Wall Street's most popular stocks -- the Magnificent Seven tech giants that have led major indexes to records -- is much less clear.

Those market leaders -- Amazon.com, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia and Tesla -- have been buffeted recently by questions about the potential for artificial intelligence, concerns about their increasingly stretched valuations and competition from hitherto unloved parts of the market.

In the coming days, the tech sector will face a key test when Nvidia, the world's most-valuable listed company, reports earnings. What investors learn there could be key to further gains.

Joshua Boyer, 43, said he has trimmed his exposure to megacap tech stocks like Nvidia, Microsoft and Meta by about 25% in recent days. The Phoenix resident said shares have grown expensive relative to the companies' earnings and said he's satisfied with the outsize returns over the past several months.

"Anytime I see them getting top-heavy, I'm totally fine taking some money off the table," he said.

He isn't alone. Even after Federal Reserve Chairman Jerome Powell sparked a broad rally Friday by opening the door to rate cuts in September, tech posted a 1.6% slide for the week, lagging behind S&P 500 sectors including energy, materials and real estate, which all added more than 2%.

And data suggest that many individual investors -- often the most-enthusiastic fans of tech firms -- have grown more cautious. They were net sellers of stocks for the first time in two months during Tuesday's steep tech declines, according to a JPMorgan report, particularly firms like Palantir, Alphabet and Broadcom.

The growing doubts echo a much sharper reversal of the AI trade earlier this year, when a new, lower-cost model from Chinese firm DeepSeek rattled tech investors and erased $1 trillion of market value in a single day.

Analysts said conditions were primed for a pullback: The Nasdaq has climbed some 41% from its April 8 low, lifting valuations for some of the biggest tech firms to sky-high levels.

At the same time, stubbornly high inflation readings and deepening cracks in the labor market left some investors jittery, and many expected Powell to sound cautious about cutting rates in his Friday speech.

Those nerves were compounded by the lackluster launch for OpenAI's GPT-5, which the company had marketed as "a PhD-level expert." OpenAI faced an intense backlash when the product failed to answer basic math questions or carry out other simple tasks. Some were put off by its colder tone and how it routed user queries to its different AI models.

OpenAI CEO Sam Altman compared current market enthusiasm for AI investments to the conditions during the dot-com boom and bust more than two decades ago. Meta froze its AI hiring spree. And a report from one MIT initiative said that AI use at hundreds of companies hasn't produced significant revenue growth or profits.

"There's been a vibe shift," said Jéssica Leão, a partner at venture-capital firm Decibel, who pointed out in a recent blog post that OpenAI had promised a superintelligent GPT-5, which Altman marketed with a Death Star teaser. Instead, "we got a model router."

At the same time, investors are expecting lower interest rates to buoy an economy rattled by President Trump's trade war and immigration policies. That could lift sectors like real estate that have lagged behind the market heavyweights this year.

Rod Poole, 66, said he has avoided adding to the tech exposure in his portfolio this year. Instead, he has snapped up shares of Duke Energy, homebuilder DR Horton and a pair of healthcare-focused funds. On Thursday, he piled in on another bet he expects to pay off if economic pressures persist: Walmart.

"History tells us these things don't play out forever," he said of the AI investing boom. "I'm more comfortable doing the defensive plays."

Adding to the volatility: Mid-August is a seasonally slow period for stocks, when Wall Street empties and professional investors head off on summer vacations. The reduced trading volumes can lead to bigger market swings on slow days.

And some investors said the recent moves exemplified the risks of betting on a new technology, with companies still racing to develop their models and figure out ways to use them to increase profits.

"That's the AI trend in a nutshell: We have these big, long rallies and then cold water gets thrown on it," said Bret Kenwell, U.S. investment analyst at eToro. "It's two or three steps forward and one step back."

 

(END) Dow Jones Newswires

August 24, 2025 21:00 ET (01:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.

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