Yesterday, the Nasdaq Composite faced a substantial decline, closing down 2.04%. Notable tech giants such as Palantir and Reddit saw their stock values plummet by nearly 8% and 8.4% respectively. Other major players like Nvidia and Softbank also experienced notable losses, with Nvidia dropping 4% and Softbank hitting a low of 10% at one point during the trading day. This trend highlights the increasing vulnerability of the markets, particularly concerning a potential selloff in tech stocks.
In October, analysts from Bank of America reported that tech stocks significantly impacted the S&P 500, contributing more than 90% of the total return for the month. Notably, the so-called Magnificent 7 stocks alone were responsible for an impressive 80% of this return. These same stocks were the ones that suffered heavy losses yesterday, raising concerns about their potential for further declines in the upcoming trading sessions, as indicated by the futures markets.
The situation is not isolated to the U.S. markets; Asian markets are similarly influenced by a limited number of companies. According to Arjun Neil Alim of the Financial Times, in Hong Kong, just six tech stocks account for 50% of the Hang Seng’s returns this year. In South Korea, two stocks contribute to 40% of the index's performance, while in Taiwan, a single stock is responsible for more than half of the return. This narrow rally parallels the influence of the Magnificent 7 on the S&P 500 in the United States.
Amid these fluctuations, numerous Wall Street analysts are contemplating whether equities might be on the verge of a 10-20% correction, a sentiment echoed by the CEOs of Goldman Sachs and Morgan Stanley in recent statements. Adding to the market tension, Michael Burry’s hedge fund, Scion Asset Management, recently disclosed a significant short position valued at $1.1 billion against both Nvidia and Palantir. Burry is well-known for his prescient shorting of subprime mortgages before the Great Financial Crisis of 2007.
Despite Palantir’s rapid growth, with a current market cap of $450 billion, its annual revenues are projected to be only $4.4 billion. CEO Alex Karp expressed his frustration over the short bet, especially following the company’s recent achievement of a Q3 revenue gain of $1.2 billion, marking a 63% increase and surpassing expectations. Following the market's downturn, Palantir’s stock fell an additional 3% in overnight trading.
Karp criticized Burry’s moves during an appearance on CNBC, stating, “The two companies he’s shorting are the ones making all the money, which is super weird. The idea that chips and ontology is what you want to short is batshit crazy.” He further declared, “I do think this behavior is egregious and I’m going to be dancing around when it’s proven wrong.”
As we look ahead, investors remain on edge, monitoring the developments in tech stocks and their broader implications for the market. The opening bell in New York is set to provide further insights into how these trends will continue to unfold.
