The technology sector is often volatile and not always in an investor-friendly way.

Wall Street has suffered heavy losses in recent weeks. S&P500 (^GSPC -0.24%) The index fell by 8.5% from July 16 to August 5. During the same period Nasdaq 100 Index recorded a price decline of 12.3%. And the Vanguard Information Technology ETF (VGT -0.58%)which focuses on stocks in the technology sector, saw a decline of 14.8%.

The jump was led by some real heavyweights. Artificial intelligence (AI) chip designers NVIDIA (NVDA -2.38%) For example, the company recorded a price drop of 20.5% during this three-week period. The manufacturer of AI systems Super-microcomputer (SMCI -2.39%) — also known as Supermicro — suffered a 30.6% drop in the same period, and the chipmaker veteran Intel (INTC -2.25%) suffered a crash of 41.4%.

The market is already recovering from this dramatic drop, but the technology sector is still lagging behind the overall market. Let’s take a look at the driving forces behind this tech sector crash and what it all means for investors.

1. Mixed results reports

The third earnings season of 2024 is already drawing to a close, and it has not always been kind to tech investors. Many leading tech stocks either delivered disappointing results or set modest guidance targets for the second half of the year, often with price-depressing consequences.

The list of market-moving earnings reports includes Supermicro and Intel. Both fell short of Wall Street’s consensus earnings targets and reported difficult obstacles on the road ahead. Intel’s problems prompted a $10 billion cost-cutting program and paused the company’s dividend program.

Management comments provide insight into what is happening:

• “The trends in the second half of the year are more challenging than we expected,” said Pat Gelsinger, CEO of Intel, referring to the difficult economic situation. Keep that thought in mind.
• Supermicro CEO Charles Liang noted that the company’s long-term investments in factories are hurting the bottom line. “We expect near-term margin pressure to ease and return to normal before the end of fiscal 2025,” he said.
• Arm Holdings (ARM -2.70%) Chief Financial Officer Jason Child gave only weak revenue and margin guidance for the full year because, as he said, “inventory issues in the industrial Internet of Things and networking markets appear to be more persistent than originally anticipated.” In other words, the outperformance of the past few quarters has led to overfilled product pipelines and warehouses.
• In The trading desk‘S (TTD -0.24%) CEO Jeff Green said on a quarterly earnings call that his ad-buying customers are “struggling with a lot of uncertainty.” Companies are doing well, but consumers are holding onto their families’ wallets, which reduces the effectiveness of marketing messages. “That’s having a significant impact on how companies market their products, from pricing to packaging to advertising,” Green said.

There are some commonalities between these analyses. Most of these guiding stars lead me back to…

2. …this damn economy

The inflation crisis is waning, the US Federal Reserve is planning to cut interest rates in September and the economy as a whole is getting back on its feet.

But the economic crisis is not over yet, and there is still room for nervous reactions from investors. Any hint that rate cuts might be delayed sends markets plummeting further. A slight rate hike in Japan triggered another bearish market reaction globally. Add to that the insights and concerns expressed by corporate leaders in the last section, and this bull market is starting to feel unstable.

This is bad news for the high-flying market darlings. It is also not good for the aspiring innovators of the future – it seems to be a problematic time to seek funding or go public. As a result, both established market leaders and smaller upstarts are seeing their perceived market value hit.

3. Investors are losing patience with the stalled AI boom

Of course, the list of sharp price drops also includes many of the leading names in AI technology. Nvidia’s share price drop alone has cost the AI ​​boom $637 billion in market value. The company hasn’t even reported its results in July – its second-quarter update is scheduled for August 28. Here, investors are applying the experiences of other industry participants to Nvidia’s situation.

And maybe – just maybe – market makers were a little too enthusiastic about the early AI boom.

Yes, generative AI is a groundbreaking technology, but questions still remain. For example:

• How quickly will this revolution lead to lasting changes in business outcomes in the AI ​​sector? Nvidia’s initial lead in hardware could fade as other chip designers develop comparable hardware, perhaps at lower cost or with more efficient power and cooling solutions.
• OpenAI’s ChatGPT is currently the ultimate large language model (LLM), but one day another engine may steal the title.
• And I’ve heard many business leaders rave about the industry-changing power of generative AI, but there aren’t many examples of this effect in practice yet.

Some of these fears may never come to fruition, and this could be just a brief lull in the rapid pace of AI innovation. But in the stock market, perception quickly becomes reality, and every investor is working with incomplete information about the current and future state of affairs.

And with this thought, my last section somehow writes itself.

4. Time to take some profits?

Despite recent price declines, the AI ​​industry’s market darlings are still significantly up. On August 5, at the low point of the brief panic, shares of Nvidia and Supermicro had still more than doubled year to date. Arm Holdings recorded a 47% gain that day.

I can’t blame concerned investors for being able to convert some accounting profits into cash under these circumstances. The resulting price reductions made those same stocks a little more affordable for the next wave of optimistic AI investors, and the excitement continues.

Ultimately, the recent decline in tech stocks amounted to the usual market noise. Opportunistic investors should look for such short-lived buying opportunities, with the obvious caveat that the next move lower could be permanent. No one really knows until it happens.

Until then, it’s best to take a moment to look at the current market and rebalance your portfolio based on your long-term views. Personally, I’m a little worried about Nvidia’s grab for the hardware crown, while Intel and The Trade Desk look undervalued today. Your results may vary, but feel free to start your next stock-picking research right here.