Last week, Wells Fargo warned that mega-cap stocks face a correction. Their valuation may be narrow compared to the rest of the stock market.
Companies that did not perform well either need to catch up to the magnificent 7 mega-cap names – Alphabet, Meta Platforms, Amazon, Apple, Microsoft, Nvidia, and Tesla. Conversely, those stocks may fall toward the average stock valuation.
Investors who held Nvidia for an incredible double return this year may panic. The more NVDA stock drops, the less profit they have on paper. The holding is not a profit unless they sell.
Last year, the crash happened quickly. 2022 started with a strong rally for a day, only for a reversal. From there, selling pressures mounted. The Fed’s rate hike cycle solidified the downtrend. Today, the market merely needs to doubt the AI hyper-growth story. If they view the AI narrative as bogus, tech investors will run for the exit.
For now, the market is calm. Nasdaq (QQQ) rallied by 211 points, up 1.6%, last Friday. The market decided the strong jobs market indicated a good economy. It also gives the U.S. Feds the room to raise rates without fear of job losses.
Higher interest rates are a negative catalyst for megacaps.