The AI premium is gone: US tech stocks now trade cheaper than the S&P 500 for the first time since 2017

A year ago investors paid about 32 dollars for every dollar of profit they expected from America’s technology companies. This week they paid about 17, less than they now pay for the average large US company.

Keith Lerner of Truist Wealth says the tech stocks in the S&P 500 trade at roughly 17 times expected earnings, below the index’s 18 times. It is the first time since 2017 that technology has been cheaper than the wider market on that measure.

The reversal follows a punishing week. The S&P 500 and the Nasdaq each fell about 3 per cent, their fourth straight weekly loss, and tech had its worst day since the 2020 COVID crash on Thursday, US time.

Who took the hit?

Almost all the damage was in chips and AI hardware. Marvell and Sandisk each lost about 28 per cent over the week, Micron and Dell about 22 per cent, and Nvidia 8 per cent.

Away from AI, the market barely noticed. The equal-weight S&P 500, which gives every company the same say, closed at a record on Wednesday and ended the week within about 1 per cent of where it started. Amazon rose about 9 per cent, and Costco, Home Depot, Alphabet and Microsoft gained between 2 and 4 per cent.

“At a 32.0x P/E last year, the market had baked in a lot of good news,” Mr Lerner said, describing a “buyers’ strike” in tech.

How cheap are the chipmakers?

Cheaper than at any point in the AI cycle, according to Bank of America semiconductor analyst Vivek Arya. The Philadelphia semiconductor index trades at 13.7 times expected earnings against 17.7 times for the S&P 500, a 22 per cent discount. Through the AI boom, chips carried a premium of about 15 per cent.

The index peaked on 22 June and had fallen 38 per cent by Thursday’s close, before rebounding 4.9 per cent on Friday. In four earlier chip downturns since 2011, it fell between 23 and 46 per cent, and the S&P 500 fell with it, by 12 to 25 per cent. This time the wider market has barely moved, a split Bank of America says has no precedent in those cycles.

Why are investors losing faith?

The worry is the money being spent on AI data centres. Bank of America estimates US cloud providers are spending about US$300 billion a quarter, or US$1.2 trillion a year, while analysts expect US$1.55 trillion in 2027. If spending merely holds flat, 2027 would come in about US$355 billion short of expectations, and chipmakers’ sales would take the hit first.

Mr Arya says a 20 per cent cut in AI spending in 2027 would cut AI chipmakers’ sales by more than 20 per cent and their earnings by 35 to 40 per cent or more. He expects earnings forecasts to start falling in the first quarter of 2027 and says investors will probably need to see those cuts before confidence returns. In past cycles the chip index bottomed at about 12 times earnings, which would mean at most another 12 per cent fall from here.

What does history say comes next?

Usually, better times. Since 1990 the S&P 500 has had 33 streaks of four or more losing weeks. Three months later it was higher about 80 per cent of the time, with a median gain of 6 per cent, and a year later the median gain was 16.5 per cent. Truist also notes US shares have risen in the year after every midterm election since 1946.

The exceptions are the ones investors fear most: the dot-com bust and the 2008 financial crisis, when the index kept falling for another year. Not everyone is buying the dip. Michael Martin of TraderMindset says lower prices reflect smaller companies, not better value, and advises holding cash.

What does it mean for Australians?

Most Australians own US tech without choosing to. The big US technology companies are among the largest holdings in the international shares options that make up a large part of most superannuation balances, so a fourth losing week on Wall Street shows up in super statements as well as in US share accounts.

A cheaper tech sector cuts both ways for members: balances have fallen, but regular contributions are now buying the same companies at about half the price-to-earnings ratio of a year ago.