By Akane Otani 

Technology stocks tumbled across the board Wednesday as executives from Facebook Inc. and Twitter Inc. defended before Congress their efforts to prevent election meddling, the latest episode showing the vulnerability of investors' bets on megacap technology companies.

What was unusual about Wednesday's selloff was how indiscriminate it appeared: hitting not just the social media titans that were the subject of the Capitol Hill hearing on foreign influence in the 2016 election but also chip makers, software developers, online streaming services and videogame makers.

Facebook fell 2.3% and Twitter dropped 6.1%, while Google parent Alphabet Inc., which didn't send a representative to the hearing, lost 1%. Streaming giant Netflix Inc. slumped 6.2%, while chip maker Nvidia Corp. and "Candy Crush Saga" owner Activision Blizzard Inc. each lost more than 1%.

In all, 59 of the 73 companies in the S&P 500 technology sector posted losses on the day, a striking retreat for the best-performing group in the broad index this year. The tech-heavy Nasdaq Composite shed 1.2% and recorded its biggest decline in three weeks, while the broader S&P 500 fell just 0.3% and the Dow Jones Industrial Average rose 0.1%.

"Social media, cybersecurity, cloud -- all of these things have done exceptionally well this year," said Frank Cappelleri, executive director and technical analyst at Instinet. As a result, when even a handful of tech companies are swept up in controversy, there is the potential for "that much more fallout," he said.

Investors had already been skittish on the technology sector prior to Wednesday's rout.

The group tumbled in March as controversy over Facebook's handling of user data raised fears of a broader reckoning. Over the summer, disappointing earnings and forecasts for growth sent a number of stocks, including Facebook, Netflix and Intel Corp., sliding again.

Yet each time, the tech sector quickly rebounded, something investors say suggests a rally driven largely by so-called momentum trading -- when investors pile into the stocks that have run up the most, regardless of fundamental factors like earnings and valuations. When the trend reverses, it can spark a broad pullback, as was the case Wednesday.

"There is an increasing sense by many that some of the more trendy tech names can only go up, which is putting some managers in a position where they feel they need to add to positions in the mega-tech stocks to keep up," said Craig Birk, chief investment officer of Personal Capital.

The prospect of a prolonged reversal has led global fund managers to rank bets on the so-called FAANG BAT group -- which includes tech titans in the U.S., as well as Chinese firms Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. -- as the most-crowded trade for seven consecutive months, according to Bank of America Merrill Lynch's monthly fund manager survey. That possibility has also pushed analysts at firms including RBC Capital Markets and Morgan Stanley to adopt a more cautious stance on technology stocks, citing the risk the rally has been overdone, as well as the recent shift among investors toward bond-like sectors of the stock market.

Yet growing wariness among investors has done little to dent the technology sector's rally.

Technology stocks in the S&P 500 remain up 18% in 2018, by far the best-performing group in the broad index, which is up 8%. Amazon.com Inc., part of the S&P 500 consumer discretionary sector, followed Apple Inc. on Tuesday to become one of two U.S. companies to reach $1 trillion in market value. The two, along with Facebook, Netflix and Google parent Alphabet, make up the FAANG group.

Wednesday's pullback was a reminder to investors of the fallibility of the tech trade, which has dominated the latest leg of the nine-year bull market. Amazon, Apple and Microsoft Corp. have accounted for more than 35% of the S&P 500's total return this year, according to S&P Dow Jones Indices data through Aug. 28.

After a big run-up, "people are just looking for a reason to take profits," Mr. Cappelleri said.

Write to Akane Otani at akane.otani@wsj.com

 

(END) Dow Jones Newswires

September 05, 2018 16:49 ET (20:49 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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