The Dow Fell 105 Points Because Tech Stocks Got Crushed

Stocks fell Wednesday even as a fiscal stimulus bill moved closer to passing. But the S&P 500 has run hot of late and many on Wall Street believe the market needs a pause.

The Dow Jones Industrial Average fell 105.07 points, or 0.35% to close the day at 30,068. The S&P 500 fell 0.79% to 3672 and the tech-heavy Nasdaq Composite fell 243.82 points, or 1.94% to close at 12338. Qorvo (QRVO), which fell 5.6%, was the biggest loser in the S&P 500.

Why did the Nasdaq get smacked? “We think it’s more of a digestion of the [recent] gains,” Yung Yu Ma, chief investment strategist at BMO Capital Markets told Barron’s. “It’s not something that’s the start of a major trend. There’s going to be some consolidation until these companies show a couple good quarters.”

The Nasdaq-100 had gained 5.3% during a 10-day winning streak between November 24 and December 8.

Positively, the White House pushed out a fiscal stimulus offer of $916 billion, a package that would include $600 cash grants to households. It currently does not include $300 unemployment benefits, much to the chagrin of House Speaker Nancy Pelosi. Overall, the bill would act as a bridge for households and small businesses until vaccines are widely distributed. But the market has been pricing in that stimulus and the S&P 500 is up 3.7% since November 12, the start of a mini-rally in stocks after a brief pause. Stocks have gone nowhere in the past few days.

Moreover, valuations for S&P 500 companies are looking increasingly stretched; U.S. large-cap stocks—trading at just over 22 times the next 12 months of earnings projections—are currently sitting near their most expensive level in history, according to research from Glenmede’s Investment Strategy Team lead by Jason Pride. The currently high valuation level is partly because ultra-low interest rates encourage investors to take more risk in stocks over safe bonds, but Glenmede’s statistic also partly accounts for low interest rates and low inflation.

In the midst of the move out of large-caps, investors have been favoring small-caps, which tend to outperform when the economy is seen bouncing back from a recession. The Russell 2000 did fall 0.81%, but has been beating large-caps since September. Small-caps are trading at their 75th percentile of valuation historically, according to Glenmede, making them relatively attractive to investors.

Looking ahead, E*Trade’s managing director of trading and investing product Chris Larkin has a key takeaway: “There is at least a little more room to run as investors rotate into beaten-down cyclical sectors like energy, and small-caps in hopes of recovery,” he explains. “But that doesn’t mean we can rule out volatility or even a correction in the near-term.”

Write to Jacob Sonenshine at