Tech Valuations Drop Below Broad Market for First Time Since 2017 Amid AI Sell-Off

Key points

• The S&P 500 and Nasdaq fell approximately 3% for a fourth straight week, capping a volatile period that included a Friday bounce in chip stocks.
• Tech stocks in the S&P 500 (XLK) traded at about 17 times expected earnings, below the broader index's 18 times, a level not seen since 2017.
• The PHLX Semiconductor Index lost nearly 30% over five weeks, with Micron and Sandisk each dropping more than 20% in the final week alone.
• The equal-weight S&P 500 (RSP) closed at a record, indicating that non-tech stocks remained resilient despite the headline index declines.
• Truist Wealth advises staying overweight US large caps and adding small caps as a hedge against rotations away from megacap tech.

Background

This volatility follows a period of strong performance for AI-related stocks, which peaked in October 2025 at 32 times earnings. The current sell-off contrasts with the broader market's resilience, as the equal-weight index reached new highs. Historical data shows that the S&P 500 has risen in the year after every midterm election since 1946, though exceptions occurred during the dot-com bust and 2008 financial crisis.

How outlets are covering it

Analysts are divided on the implications of the valuation drop. Keith Lerner of Truist Wealth views the lower multiples as a sign that the market has priced in bad news and suggests a 'buyers' strike' in tech, particularly in chips, which may slow data-center spending but improve cash flow. Conversely, Michael Martin of TraderMindset.com argues that lower prices do not equate to better value, describing the market as being in a downtrend and advising against buying the dip. RealMoney Pro notes that the tech sector is now 'oversold,' a condition not reached during the March 2026 market drop, suggesting the current rout may be overdone due to short-term thinking and leverage.

Why it matters

The shift in valuations signals a potential rotation in market leadership and a reassessment of AI-driven growth expectations. If the slowdown in data-center spending eases cash drain for major AI spenders, it could elongate the current cycle. However, the divergence between tech and broad market performance highlights the risk of concentrated bets on megacap tech, prompting investors to consider diversification into small caps and other sectors.

What to watch

Investors will watch key support levels, such as the 200-day moving average for Palantir and the 100-day moving average for Nvidia, to determine if the sell-off has bottomed. Truist Wealth expects that a little good news could go a long way in shifting the market sentiment, while others remain cautious until the S&P 500 holds its 200-day moving average. The next few weeks will likely see continued volatility as the market digests the impact of the AI trade and midterm election outcomes.