Nasdaq collapsed! Technology stocks fell, defensive stocks rose, is everything following the script from 2000?

Overnight, US stocks faced intense selling pressure, with the market value of the "Big Seven" in the US stock market evaporating at a record pace. The Nasdaq plummeted by over 3%, marking the first time in 400 trading days.

The AI frenzy in the first half of this year drove US stocks to repeatedly hit new highs. However, investors' concerns about the returns on AI have suddenly escalated recently. Disappointing financial reports from Tesla and Alphabet became the catalyst for the market turmoil on Wednesday.

Tech Stocks Fall, Defensive Stocks Rise

On that day, the S&P 500 plunged by 2.3%, marking its worst performance since December 2022; the Dow fell by 1.2%, dropping 504 points; the tech-heavy Nasdaq plummeted by 3.6%, marking its largest decline since October 2022, with a market value loss of $1 trillion.

Tesla plunged by 12%, Google dropped by over 5%, and the "Big Seven" in the US stock market all suffered losses, falling by 5.9%, breaking below the 50-day moving average for the first time since May. The overall market value evaporated by $768 billion, marking the largest single-day market value loss since Meta went public in 2012.

Wednesday's market sentiment shift also affected semiconductor and other product stocks related to the AI supply chain. AMD fell by 9.1%, Broadcom fell by 7.6%, Qualcomm and AMD also fell by over 6%.

However, defensive sectors such as utilities, essential consumer goods, healthcare, and energy all rose against the trend. Defense contractor Lockheed Martin rose by 2.8%, hitting a historical high; AT&T fell by 5%, marking its largest increase this year.

Recently performing small-cap stocks also "cooled off," with the small-cap index falling by 2.1% overnight. As tech stocks took a hit, investments shifted towards mid-cap companies, with the Russell 2000 index outperforming the S&P 500 by 10.9 percentage points over the past 11 trading days, marking the largest advantage in over 24 years. Many analysts believe that mid-cap companies may be among the beneficiaries of the interest rate cutIt is worth mentioning that many traders currently expect increased market volatility in the future. The CBOE Volatility Index (VIX), which measures Wall Street's panic sentiment, rose by 22.55% to 18.04 on Wednesday, marking the largest increase since 2022. José Torres, Senior Economist at Interactive Brokers, stated that multiple factors are converging, potentially leading to continued sharp adjustments in the stock market, with risk aversion sentiment dominating Wall Street.

A Replay of the 2000 Script?

Tech stocks fall, defensive stocks rise. When the tech bubble burst in 2000, the U.S. stock market also experienced similar fluctuations.

Jim Reid from Deutsche Bank pointed out that at that time, tech stocks went through a massive rotation, and the market had not yet seen the biggest drop.

Reid illustrated the scene before the burst of the tech bubble in March 2000 through charts: defensive sectors such as consumer staples, healthcare, and utilities saw significant declines, while tech stocks attracted a large amount of capital. When the bubble burst, funds quickly flowed back, causing stock prices in defensive sectors to rise by 35-45% by the end of the year compared to March when the bubble burst.

Although the S&P 500 index fell by 10% in the three weeks after the bubble burst, by September, it had returned to near the peak of the tech bubble. It was not until 2001 and 2002 that the market experienced larger declines, coinciding with the eventual economic recession and corporate fraud scandals (such as Enron and WorldCom) at the time, which were only possible in the frenzy of the first tech bubble.

Reid believes that this historical phenomenon may repeat itself.

"It makes one wonder what kind of major corporate fraud will occur once the AI bubble bursts."

Ultimately, the market values of tech companies and telecom companies fell by about 85% and 75% respectively from their peak at the end of 2002. Meanwhile, consumer staples were over 25% higher than the tech peak in March 2000.

Recent doubts have arisen among investors about how long it will take for the significant investments in AI technology to yield returns.

Alec Young, Chief Investment Strategist at Mapsignals, stated:

Too much money is being spent now, and investors realize that it will take time to see returns. In the short term, the momentum of giants will be influenced by how much the market has invested in this area. The sharp fluctuations in tech stocks indicate that investors seem to be increasingly listening to the growing rumors on Wall Street that the bubble caused by AI over the past year is bound to burst. Although Wednesday may not mark the beginning of this trend, the magnitude of the decline rings alarm bells.