The big move down in stocks that started at the end of last week could herald the end of tech stocks' dominace, one strategist says.
iStock; Rebecca Zisser/BI
The recent bloodbath in stocks might mark the beginning of the end of the artificial intelligence-fueled craze among investors.
Paul Dietrich, chief investment strategist of B. Riley Wealth Portfolio advisors, has been warning for months of an impending recession and stock market crash, particularly as enthusiasm for AI bleeds out of the market.
In a note on Tuesday, Dietrich said that his thesis has been bolstered by the recent sell-off sparked by weak economic data, which pushed the Nasdaq Composite into correction territory.
He pointed to the similarities between the dot-com crash and the latest drop in the stock market. Apple, which lost 79% of its total market value in the early 2000s, has dropped 8% over the past month. Amazon, which lost 93% of its total value in the dot-com era, has plunged 18% over the last month.
The flow of "smart money" in the market also suggests more downside could be on the way for tech stocks, Dietrich noted. He pointed to large stock sales initiated by tech CEOs, like Jeff Bezos, whose total sales of Amazon stock have totaled $13.5 billion so far this year. Meta CEO Mark Zuckerberg has sold off around $1 billion in company stock, while Nvidia CEO Jensen Huang has sold nearly half a billion worth of company shares so far this summer, according to securities filings.
"These investors do not think their companies are bad investments; they merely believe the stock market is currently valuing them far above their worth," Dietrich said. "I feel sorry for many average investors still piling into the stock market chasing the Artificial Intelligence (AI) hype and other tech stocks when many of those founders are selling out."
The economy, meanwhile, looks poised to enter a recession, Dietrich said, posing more bad news for stocks. Historically, stocks have declined 36% when the economy enters a recession, even if the downturn proves to be mild, Dietrich has said in previous notes.
He pointed to a slew of indicators that could suggest a downturn is on its way. Markets are coming off of one of the longest bull markets of all time, he noted. Corporate earnings have been "spotty." Interest rates in the economy remain at their highest levels since 2001. Meanwhile, the economy has triggered multiple recession warnings with near-perfect track records, like the yield curve inverting, and the unemployment rate rising past a key threshold typically associated with recessions.
"What kind of evidence does one need to see that we are moving into a business cycle recession," Dietrich said. "Eventually, we will have another long-term bear market recession."
Though he didn't have an exact prediction for when a downturn could strike, Dietrich said the economy could start entering a mild recession by the end of the year. That could fuel as much as a 40% downside in the S&P 500, he predicted, pointing to historical losses in the stock market when the economy entered a recession.
Recession fears spiked last week after the job market was found to slow more than expected in the month of July, fueling concerns that the Fed may have made a mistake keeping interest rates too-high for too-long. Investors are ramping up bets for steep rate cuts and even an emergency rate cut by the end of the year, a move central bankers have typically only employed during times of extreme volatility.
