Why AI stocks Broadcom, Meta Platform, and Intel fell today

Stocks of big technology companies and companies that will benefit from AI, Broadcom (AVGO -2.62%), Meta Platform (Meta -4.13%)and Intel (International Trade Commission -3.71%) On Thursday, they were down 3.1%, 3.8% and 4.2%, respectively, as of 1 p.m.

There could be a variety of reasons why some of the AI-related winners could fall across the board, including bad news in the AI ​​investment space or an overall market pullback.

But that's not what's happening today. In fact, Broadcom has received a big analyst boost.

The reason for the drop in stock prices seems, counterintuitively, to be the very good economic news that was released this morning, but as the technology sector has outperformed all other sectors this year, investors have swiftly exited this winner sector and put their money into other, much cheaper stocks, especially battered small caps.

Moderate inflation will spark a return to battered value stocks

Consumer Price Index data for June was released this morning, with very good news that inflation was weaker than expected. The headline year-on-year CPI reading was 3%, down from 3.3% in May and below the 3.1% forecast. On a core basis, which excludes volatile energy and food prices, core CPI was 3.3%, down from the previous month, below expectations and the lowest since April 2021.

But those numbers are likely higher than what Americans actually see in their daily lives because the CPI's weighted housing component is higher than average. But the way the housing component is calculated works with a lag. So the 5.2% increase in last month's index reflects a previous increase from more than a year ago, not the roughly 0.4% increase in the first quarter's New Tenants Index, which measures rent growth in real time.

Overall, this is great news. So why would this data cause tech stocks to fall, especially since many growth tech stocks tend to benefit from lower inflation and interest rates?

The reason for this is largely due to the strong rise in AI-related stocks since the start of the year. In the first half of the year, large AI-related stocks were almost the only stocks to rise, while many other stocks, especially small-cap stocks, underperformed. This is due to the “sticky” inflation seen in early 2024, when the decline in inflation in 2023 seemed to have plateaued. As you can see, Nasdaq 100 Large Cap Index and Russell 2000 Small-cap indexes saw widely varying results in the first half of the year.

Data by YCharts.

The small caps that make up the Russell 2000 tend to be considered more cyclical. This could be because they are riskier and must borrow at higher interest rates, or because the small cap index is more concentrated in financials, energy and industrials and less concentrated in technology. S&P or Nasdaq Large Cap Index.

So today's inflation report is likely to reassure investors that inflation is back at 2%. Meanwhile, job growth remains strong, adding 206,000 jobs in June.

More evidence of a “soft landing” means “risk-on” trading, especially for stocks trading at lower multiples. So, despite inflation remaining high, AI tech stocks have been rallying all year, and today it seems that large investors are selling these winners and “shifting” to smaller caps. As of 1pm ET today, the Nasdaq was down about 1.9%, while the Russell 2000 was up about 3.1%.

The move was enough to send Broadcom shares lower, even as Rosenblatt analyst Hans Mosesmann raised his price target on Broadcom from $1,650 to $2,400, citing continued high growth in AI. Notably, Broadcom shares are set to split after the market closes tomorrow.

There is potential for further progress in this rotation.

Today is only one day, but there may still be some time left in this rotation. Recent research shows that JPMorgan Chase The valuation gap between high-quality large-cap stocks and high-quality small-cap stocks is nearly at record levels last seen at the end of the tech bubble in 1999, analysts say. After the dot-com bubble burst, small caps continued to outperform over the next decade.

So even after today's moves, it might be a good time to take a look at some of your favorite small-cap stocks. But tech investors can also take solace in the fact that today's drop has absolutely nothing to do with bad news about these companies' respective businesses.