Nasdaq slumps more than 4.5% for the week as high-flying tech stocks bleed

Wall Street ended slightly lower on Friday, driving home a mostly steep decline for the week on the back of sliding technology stocks. With diplomatic efforts in the Middle East having taken a positive turn and oil prices continuing to slump, the geopolitical risk premium has been effectively removed and market participants have turned their attention squarely back to the high-flying artificial intelligence trade.

It was also a consequential week for the outlook of monetary policy, after key inflation and economic growth data was published on Thursday, followed by improving consumer sentiment indicators on Friday.

The benchmark S&P 500 index fell 0.3% to close at 7,338.39 points, the tech-heavy NASDAQ Composite declined 0.2% to settle at 25,297.62 points, and the blue-chip Dow Jones Industrial Average lost 0.1% to conclude at 51,865.52 points.

For the week, the S&P was down 2.2% and the Nasdaq an even worse 4.6%. The Dow bucked the trend and eked out a gain of 0.6%.

Tough week for AI trade as memory space takes spotlight

The S&P 500 Technology sector posted a weekly decline of more than 5%. The big theme over the last few days was the state of the memory market, amid major announcements and media reports centered on South Korean giants Samsung Electronics and SK Hynix, and blowout quarterly results from the world’s third-largest memory chipmaker, Micron Technology.

The memory market in general is suffering from a prolonged supply crunch as demand for AI processes continue to explode. Prices for standard and enterprise Dynamic Random-Access Memory (DRAM) and High Bandwidth Memory (HBM) products have shot up, especially for the latter which are used in AI hardware, graphics processing units (GPUs), and supercomputers. Against this backdrop, memory chipmakers such as the two South Korean majors and Micron have seen outsized gains in their stocks.

This week’s tech weakness began on Tuesday after a ChosunBiz report said SK Hynix was reallocating resources and shifting focus back to the mainstream DRAM market. The news sent both SK and peer Samsung sharply lower, which in turn weighed on the broader KOSPI gauge and sent it tumbling to its second-biggest one-day decline in history.

The stocks rebounded over the next two days, helped by SK’s announcement of a planned $29.4 billion Nasdaq listing. But both tumbled again on Friday, triggering a third circuit breaker stop for the KOSPI and sending the average to a weekly loss of about 7%.

At home, Tuesday’s South Korean bloodbath weighed on the Nasdaq, sending it tumbling over 2% on that day. But on Wednesday evening, Micron delivered stellar quarterly results and issued strong guidance, with management indicating that memory supply constraints showed little signs of easing. Investors cheered the report as proof that memory demand could outpace supply for quite some time, and sent Micron’s shares up nearly 16% on Thursday.

“The AI narrative in markets right now is all over the place, shifting from questions about ROI from the AI spend, to exuberance about the AI spend, as seen in Micron’s gaudy numbers this week. These conflicting narratives suggest that the market is in the process of picking winners and losers in this space, and that is a process that will take time,” Richard Reyle, chief investment officer at Questar Capital Partners, said.

“The same hot money that chased Nvidia over the past few years has now discovered the memory stocks, and while there is a sound business model in the memory space, their valuations are over their skis. We believe it’s prudent for investors who are sitting on big gains in the memory space to take some profits, as the memory space is largely a commodity, and these companies can’t maintain this pricing power forever. Like gravity, the mean reversion is coming,” Reyle added.

Thursday’s Micron euphoria was sharply countered by a slide in Apple after the iPhone-giant announced price increases for its MacBooks, iPads, and home devices in order to offset rising costs from the memory chip crunch. On Friday, tech received another blow after a New York Times report that Chat-GPT developer OpenAI was considering postponing its highly-anticipated initial public offering to 2027. CNBC later said that OpenAI had yet to outline an official timeline for the listing, citing people familiar with the company’s plans.