Martin Gamble on US markets: Technology rout wipes out $2 trillion

The broader US technology sector and the Nasdaq index have shed more than $2 trillion in combined market value during a sharp AI-led sell-off on 5 November.

Among the factors driving the selling was fear over the AI infrastructure buildout in states now controlled by Democratic governors after a blue wave in the midterms saw the Democrats win both the House of Representatives and the Senate in this week’s midterm elections.

Chip stocks suffer the biggest damage

The bulk of the damage was seen in chip stocks with the Philadelphia Semiconductor index shedding as much as 14%, which was one of the largest single day drops on record.

Selling was exacerbated by leveraged single stock ETFs (exchange-traded funds) with retail volumes hitting their highest since the March 2020 Covid-related rout.

These products are designed to provide two or three times the performance of the underlying stock, which means they lose two or three times their value in falling markets.

Elon Musk controlled Tesla and SpaceX lost around 10% apiece on concern his funding for GOP candidates and activities around the Department of Government Efficiency (DOGE) might prompt a response from newly elected Democratic lawmakers.

Plus, Texas has a new Democrat governor and senator, and that state is home to their headquarters and a lot of both companies’ facilities, both existing ones and those in development.

Two of the biggest fallers in the S&P 500 were Lumentum which dropped 39% and Marvell Technology which fell by a third after the two companies agreed a $115 billion all-stock acquisition, representing the largest ever deal in the chip industry.

Both companies have been riding the shift in AI data centres from copper wire to optical networks, which offer better bandwidth and lower energy costs.

Other casualties included Dell Technologies, and Micron Technology, and chip memory stocks Sandisk and Western Digital, but despite the falls, the stocks are sitting on big gains over the last year.

Were there any winners?

Only 17 stocks managed to deliver a positive performance on the Nasdaq 100 on 5 November, including PepsiCo, Keurig Dr Pepper and Costco. When the stock market is struggling, investors often seek solace in companies that could still be in demand no matter what’s happening in the world.

Defensive parts of the market were in demand in general including consumer staples and healthcare businesses with veterinary diagnostics company Idexx Laboratories gaining 21% after lifting its annual profit forecast.

Marketing platform company AppLovin surged 56% after third quarter earnings and the outlook comfortably beat expectations with revenues surging 55% year-on-year and free cash flow margins reaching 65%.

Airbnb shares were up 12% in premarket trading on 6 November after the holiday rental raised its annual revenues growth projection to high teens from mid-teens on resilient global leisure travel demand.

Apple delivers a record quarter

Apple was a bright spot among all the carnage in the technology sector. The iPhone maker’s first results under CEO John Ternus, who replaced Tim Cook on 1 September, came in ahead of analysts’ forecasts and Apple’s own guidance as fourth quarter sales rose 12% to $114.5 billion and earnings per share increased 14% year-on-year to $2.10.

The biggest positive was a reacceleration in iPhone sales which grew 17.5% to $57.6 billion, a September quarter record, providing a strong base heading into the holiday season.

The quarter only captured a small contribution from the iPhone 18 Pro and Pro Max, while the iPhone Duo launched after the quarter ended.

Ternus confirmed a ‘small percentage’ of the Duo units have been returned due to cracked screens, but Apple has replaced them and overall, the company is unable to meet demand.

Apple’s installed base of devices reached a new record across all major product categories and geographies, helping to drive 10% growth in services revenues to a record high of $31.6 billion.

The company said that rising memory prices impacted margins which was partially offset by lower costs in certain non-memory components and price rises. Chief financial officer Kevan Parekh said memory costs are expected to keep rising into next year.

While Apple shares were still caught up in the selling, they held up better than peers. The company has adopted a more conservative strategy on AI than other big tech firms.