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Why AI Stocks Broadcom, Meta Platforms, and Intel Fell Today
Shares of most of the big names in technology and AI beneficiaries, including Broadcom (NASDAQ: AVGO), Meta Platforms (NASDAQ: META), and Intel (NASDAQ:INTC) shares were down 3.1%, 3.8% and 4.2% respectively on Thursday as of 1 p.m. ET.
Widespread declines in some AI winners can occur for a variety of reasons, such as bad news in the AI investment industry or a general market pullback.
But that’s not what’s happening today. In fact, Broadcom even got a major analyst upgrade.
The reason for the declines seems to be, counterintuitively, that there was some very good economic news that came out this morning. However, with the technology sector having outperformed all others this year, investors were quick to exit this winning sector and buy other much cheaper stocks, especially those that were down. small capital letters.
A soft inflation print causes a rotation into beaten-down value stocks
This morning, the Consumer Price Index data for June was released, and it was very good news, with inflation coming in softer than expected. The year-over-year headline CPI number was 3%, down from 3.3% in May and below the expected figure of 3.1%. On an underlying basis, stripping out volatile energy and food prices, the core CPI was 3.3%, down from the previous month and also below expectations, with the lowest reading since April 2021.
But even those numbers may be higher than what Americans are actually seeing in their daily lives, since the heavily weighted housing component of the CPI is higher than average. However, the way the housing component is calculated operates with a lag. So the 5.2 percent increase in last month’s index is reflecting prior increases from a year ago or more, not the roughly 0.4 percent growth in the New Tenants Index for the first quarter, which measures real-time rent growth.
Overall, this was great news. So why would this data send tech stocks lower? Especially when many growth tech stocks tend to benefit from lower inflation and interest rates?
The reason has largely to do with the huge rally in AI tech stocks already this year. In the first half of the year, large-cap AI tech stocks were virtually the only stocks to rally, while many others, especially small-cap stocks, languished. This was due to the “sticky” inflation seen in early 2024, when the inflation rate eased in 2023 and appeared to stabilize. As you can see, Nasdaq-100 large cap index and the Russell 2000 The small-cap index had very different first half-years:
^NA100TR Chart
The small-cap stocks that make up the Russell 2000 tend to be considered more economically sensitive. This may be due to their higher risk, having to borrow at higher interest rates, or the fact that the small-cap index has a higher concentration of financial, energy, and industrial stocks, and less concentration of technology stocks than the S&P or Nasdaq large cap indices.
The story continues
So today’s inflation report appears to have reassured investors that inflation is headed back toward 2%. Meanwhile, job growth remained solid, with 206,000 jobs added in June.
More evidence of a “soft landing” means a “risk-on” trade, especially for names that trade at low multiples. So with AI tech stocks having rallied all year despite persistent inflation numbers, it looks like big investors are selling those winners and “rotating” into small caps today. As of 1 p.m. ET today, the Nasdaq was down about 1.9%, even as the Russell 2000 was up about 3.1%.
The move was enough to send Broadcom tumbling, despite the fact that Rosenblatt analyst Hans Mosesmann raised his target on the stock from $1,650 to a whopping $2,400 today, based on continued high AI-related growth. It’s worth noting that Broadcom shares will be split after the market closes tomorrow.
There may be more to do in this rotation
Although today is just one day, there may well be more room to run for this rotation. According to a recent study by JPMorgan Chase According to analysts, valuation differences between high-quality large-cap stocks and high-quality small-cap stocks have reached near record levels last seen in 1999, at the end of that tech bubble. After the dot-com bubble burst, small caps outperformed over the next decade.
So even after today’s move, now might be a good time to look at some of your favorite small-cap stocks. But for tech investors, you can also take solace in the fact that today’s drop has nothing to do with bad news surrounding the businesses of these respective companies.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Billy Duberstein and/or its clients have positions in Broadcom, Intel, and Meta Platforms. The Motley Fool has positions in and recommends JPMorgan Chase and Meta Platforms. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Why AI Stocks Broadcom, Meta Platforms, and Intel Fell Today was originally published by The Motley Fool