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The Stock Market Is Crashing for a Second Day as Tech Bubble Bursts

Last Updated September 23, 2020 2:28 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 2:28 PM
  • Major U.S. stock indexes continued to plunge on Friday.
  • Tech companies are dragging down the stock market.
  • The tech sector is overvalued and is facing a major correction.

After Thursday’s massive selloff, the U.S. stock market continued to crash on Friday despite positive news about job numbers .

The Stock Market Is Crashing Because of a Tech Selloff

After hitting record highs thanks to historic stimulus and a narrow rally in heavyweight tech stocks, the S&P 500 and Nasdaq suffered their worst day in nearly three months on Thursday as investors sold off big tech stocks. The S&P 500 was off by about 2% nearing midday. The Tech-heavy Nasdaq fell 3% as big companies like Apple, Microsoft, Amazon, and Tesla all slipped.

s&p 500 index
The S&P 500 is now up just 5% year-to-date, while the Nasdaq is less than 25% up. The stock market selloff is driven by tech stocks. | Source: Yahoo Finance 

Big tech stocks are making up for a considerable proportion of the U.S. stock market. They have fueled the massive rally from March lows. They are now dragging down the whole stock market along with smaller tech stocks like Paypal and Zoom, which plunged sharply on Friday.

The tech bubble just popped. Watch the video below:

Stock Prices Are Disconnected From Fundamentals

Market watchers have said that after tech stocks performed so well during the pandemic because people were locked in their homes using online services, we should expect a decline. Tech stocks are overvalued. Their fundamentals don’t justify their high prices.

Brad McMillan, chief investment officer at Commonwealth Financial Network, wrote in a note Wednesday: 

With valuations already at all-time highs, the market is looking stretched, and stretched valuations have historically been vulnerable to a snapback.

Economist Mohamed El-Erian warned that a shift in mindset  could be on the horizon, meaning market players should be on the lookout.

We could have another 10% fall, easily… if people start thinking fundamentals.

If investors choose to assess the stock market solely on the basis of fundamentals, they will find it difficult to ignore economic uncertainty and the implication of corporate bankruptcies, he said.

CNBC’s Jim Cramer is begging new investors to take out profits  before losing the money they so easily made during the pandemic. Traders have been gambling with the stock market, pushing it to all-time highs. A correction will bring stock prices to more reasonable levels.

We could see a rotation towards other sectors of the market as the economy recovers. Financials and travel stocks were rising on Friday.

Since tech stocks represent a significant proportion of the major indexes, the market will have trouble rising higher, with the tech sector crashing. Prices will need to be more aligned with fundamentals for tech stocks to go higher. In the meantime, the tech bubble is bursting.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The writer owns shares of Microsoft.