Is this the long-awaited tech reset?

Key points:

• Markets sold off sharply across global equities, led by a broad pullback in AI-linked and tech names after months of relentless gains.
• AI valuations are under scrutiny. Earnings have generally held up, but investors are questioning whether growth can justify lofty valuations, especially amid renewed macro and policy uncertainty.
• A base case decline of 10–15% would reflect valuation compression toward the five-year average, while a bearish tail of 20–30% would likely require a new macro shock such as higher yields, stagflation fears, or an AI capital-spending slowdown.

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What just happened

Over the past several weeks, the technology sector, and particularly stocks tied to artificial intelligence, have entered a period of heightened turbulence. After a parabolic run driven by the AI investment narrative, valuations in the Nasdaq 100 are trading near 27x forward earnings, well above the long-term average around 20x.

Key recent events:

• Palantir slipped approximately 8% despite posting a strong quarterly result and raising full-year guidance — a clear signal that investors are moving past earnings beats to scrutinise valuation and narrative.
• Warnings from major banking executives about a possible 10-20% market drawdown have added to investor caution.
• Broader thematic concerns around elevated valuations, narrow market breadth, circularity in AI investments, and concentration in mega-cap AI/Tech names are mounting.

In short: the rally has gone “too far, too fast”, meaning there is limited room for error in execution, and we may be entering a phase of valuation correction rather than further multiple expansion.

Scenarios ahead

The following scenarios are forward-looking assessments based on current market conditions. They are opinions, not forecasts, and actual outcomes may differ materially depending on macroeconomic developments, policy actions, and investor sentiment.

1. Shallow correction (–5% to –10%)

If positioning is flushed, the Fed continues to hint at easing, and no major macro shock emerges, the market could pull back modestly. That could take the index toward the 100-day moving average.

2. Base case (–10% to –15%)

If the Fed remains ambiguous, the US dollar stays firm, and investor earnings optimism is dialled back, valuations may drift toward the five-year average (~22×).

3. Bearish tail (–20% to –30%)

A deeper decline would likely require a new shock: perhaps rising yields, renewed stagflation concerns, or an AI spending slowdown that triggers broad de-risking. That could take valuations closer to the long-term mean (~20×).

What should investors do (for information purposes only)

The recent pullback appears to be valuation compression rather than capitulation, but further volatility cannot be ruled out. Investors may wish to balance opportunities with caution, recognising both potential upside and downside risks.

• Stay disciplined on quality and profitability. Companies with strong balance sheets and positive free cash flow may prove more resilient as multiples normalise; however, even quality names can face sharp valuation adjustments if earnings expectations disappoint or liquidity tightens.
• Use volatility to build exposure to long-term themes. Periods of market stress can create selective entry points in structural themes such as AI, cloud infrastructure, and semiconductor capital equipment. Yet, these sectors remain sensitive to earnings downgrades and shifts in investor sentiment, and short-term losses are possible even within long-term growth stories.
• Diversify beyond the US tech complex. Exposure to Japan, India, China technology and select European cyclicals may help mitigate concentration risk and broaden portfolio drivers. Still, regional and currency risks, as well as lower liquidity in certain markets, can introduce new forms of volatility.
• Hold some defensive ballast. Assets such as gold, cash-plus instruments, and short-duration bonds can help cushion portfolios during market drawdowns, but they may underperform in renewed risk rallies or if inflation remains persistent.

Each of these approaches carries potential trade-offs, and investors should assess whether they align with their risk tolerance, investment horizon, and diversification objectives.

Key takeaway

This looks more like a healthy reset than a structural breakdown, but the next phase will depend on new catalysts such as a revival in AI spending, stabilising yields, and a softer dollar. Until then, selectivity and disciplined positioning are likely to outperform indiscriminate dip-buying.

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Disclosure: The author(s) and/or connected persons may hold positions in one or more of the securities mentioned above at the time of publication. These holdings are subject to change without notice, and no trading intent should be inferred.