US technology stocks suffered their worst sell-off since the depths of the market turmoil in March, with the Nasdaq Composite diving into correction territory and Tesla losing more than a fifth of its value in a single day.
The technology-laden index fell for a third straight session, declining 4.1 per cent in a rout that gathered momentum in the hour before Tuesday’s closing bell. That brought its losses to more than 10 per cent since last week’s record high, marking its worst stretch in almost a half year.
Two-thirds of the stocks in the Nasdaq Composite lost ground as investors raised concerns about the valuations of technology companies, which had soared despite the economic fallout from the coronavirus pandemic.
Shares in Tesla fell 21 per cent, its worst trading day ever, with more than $82bn wiped from the electric carmaker’s market valuation, roughly the value of Morgan Stanley or Caterpillar. Other high-flying tech stocks were also knocked, with Apple falling 6.7 per cent and Microsoft down 5.4 per cent.
Shares in SoftBank plunged almost 5 per cent in early trading on Wednesday, as Tokyo dealing rooms absorbed the overnight sell-off, bringing the Japanese tech company’s total decline this week to 12 per cent.
The broader S&P 500 slipped 2.8 per cent, led by declines in tech shares. The slide pushed the benchmark US equity index to its biggest three-day decline since June, when a surge of coronavirus cases in the US rattled financial markets.
“Equities were priced to perfection,” said Alexis Gray, investment strategist at Vanguard. “That was always going to be difficult to sustain when you have a disconnect between how markets are performing and what global economies are doing.”
Daniel Grosvenor, director of equity strategy at Oxford Economics, said the rally in the big tech groups also “has been out of sync with their contribution to index earnings”. He added: “The gap between their market-cap weight and earnings weight is now similar to that of the top five at the height of the tech bubble.”
The US equity team at Citigroup calculated that once lower corporate tax rates were factored into valuations, the top 10 US tech companies were trading before the sell-off at a trailing 12-month price-to-earnings ratio of 75 times, versus 76 times during the dotcom bubble.
Investors have also expressed concerns in recent days about frantic activity in the options market. Trading volumes had soared this year, with SoftBank of Japan buying large quantities of options on tech stocks, a development first reported by the Financial Times last week.
“The bigger impact during the past few months has to be SoftBank with the amount of buying they did,” said Jim Tierney, the chief investment officer of concentrated US growth at AllianceBernstein. “Any time you have someone buying the underlying stock or options, it creates upward pressure.”
He added: “In the most richly valued names there’s still more air to come out of the balloon.”
The three-day sell-off has coincided with an uptick in volatility and a rush by traders to buy put options, which can offer protection in a market rout because they give the holder the option to sell a share at a set price. The ratio of put options to call options that traded on Friday soared to its highest level since June, according to exchange operator Cboe.
Europe’s main index, the Stoxx Europe 600, slid 1.2 per cent as shares in Frankfurt, Paris and Madrid all fell more than 1 per cent.
The Nasdaq Composite had risen by more than three-quarters between its March low and its peak this past Wednesday, with valuations supported by enormous injections of liquidity into the financial system by central banks.
Patrik Lang, head of equity and strategy research at Julius Baer, said he saw no “obvious external trigger” for the tech retreat, but considered it to be “a healthy correction, as the divergence between funky technology names and the rest of the market has recently reached extreme levels”.
Gold slid 0.2 per cent to $1,930 a troy ounce. The yield on 10-year US government bonds, which falls as demand for the debt rises, slipped by 4 basis points to 0.682 per cent.
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