By Kathleen Brooks, research director at XTB.com

Tech stocks, specifically the AI mega stocks, sold off sharply on Monday. Nvidia dropped more than 6% and is down more than 10% in the last five sessions, which is correction territory. As we mentioned on Monday, this was not driven by fundamental factors, in our view. The company is still expected to generate epic profits for this quarter. Analysts have increased their estimates for earnings in the last 4 weeks and the company is expected to generate $28bn in profits. However, Nvidia’s financial firepower is not impeding the force of the sell off. The question investors now need to ask is if the sell off has gone far enough since the stock is in correction territory, or if this is a structural shift lower, that will weigh on the major US indices and allow other regions and indices to play catch up?

The justification for the sell-off was Nvidia’s excessive valuation. This week’s sell-off in the stock is eroding some of that excessive valuation, the 12-month forward P/E ratio has fallen from 42 to 41, however, it is still well above the average for the S&P 500 of 25. Thus, there could be further downside to come, especially if investors are finally starting to get wary about paying up for AI.

Nvidia sell off not yet weighing on all global markets

Price action on Tuesday is worth watching. The Nikkei did not follow US stocks lower, and is up 0.9% today, the FTSE 100 is also inching higher, as it benefits from the rotation into energy and utility stocks. The energy sector is up more than 1.2% on Tuesday. The FTSE 100 could be a beneficiary from the stock market sell off as it is a tech-light index, and instead has a large proportion of value stocks that investors might turn towards if tech stocks continue to fall out of favour. In the short term, we expect the UK’s main index to track the Dow Jones Industrial Index closely, and to be better protected if there is a prolonged slow down in tech.

Ocado leads the FTSE 250 lower

The FTSE 250, however, is not benefiting from the rotation out of tech and is lower on Tuesday. Ocado is the worst performing stock on the index today. Its stock price is lower by more than 5% after Morgan Stanley downgraded the stock and slashed its price target to 215p from 345p. The rationale was that the paused tie up with Canadian firm Sobey’s could erode the deployment of other projects. This is a damning verdict, as it plants the seed of doubt that Ocado’s top team can deliver on its strategic plan, which is why the stock is selling off so sharply.  

The stock price is down 14% in the past 5 days and is lower by 12% in the past month. Year to date, Ocado shares have lost more than 60% and it is the worst performer on the FTSE 250 in that time. Things have gone from bad to worse for Ocado recently, and it will be hoping to stage a recovery in the second half of the year. However, a recovery in this stock is a big task since sentiment is firmly rooted to the downside as Tuesday’s analyst downgrade shows.

Bond yields suggest election fears are receding

Interestingly, although the tech market sell off is grabbing the headlines, it has not caused broad risk aversion. European stocks may be lower, but this has not had a knock-on effect on other asset classes. For example, bonds are rising across Europe and French bond yields are falling, as fears about the upcoming first round of the French Parliamentary elections start to recede. Bond yields are also lower in the UK, Germany and Italy, suggesting that the sell off in the tech sector is not spilling over to other sectors.

Commodities do not point to broad risk aversion

Commodities are down a touch on Monday, the oil price is lower and Brent crude oil is down 0.09%. However, Brent is still trading above $85 per barrel and is higher by 0.67% in the last 5 days. This suggests that the sell-off in tech is not infiltrating other sectors and is not leading to concerns about global growth. However, if the sell-off continues and we get further large daily declines for the likes of Nvidia and Super Micro, then we think this could trigger broader volatility, so watch this space. 

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