Please ensure Javascript is enabled for purposes of website accessibility

Dow Jones Plunges 600 Points as Big Tech Stocks Tumble

By Timothy Green – Sep 3, 2020 at 1:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple, Salesforce, and Microsoft were down big on Thursday.

High-flying tech stocks were selling off hard on Thursday, driving the Dow Jones Industrial Average (^DJI -1.11%) down 1.8% by 11:45 a.m. EDT. Filings for jobless claims declined slightly last week from the week before, according to a Labor Department report, but a change in methodology muddled the numbers.

Dragging down the Dow were resident tech giants Apple (AAPL 0.23%), salesforce.com (CRM -0.47%), and Microsoft (MSFT -0.20%). The three stocks, which have all soared this year, were under intense pressure on Thursday.

A man with hands on his hand and a scared expression.

Image source: Getty Images.

Big tech tumbles

The major tech stocks that have been driving the stock market rally hit a brick wall on Thursday. The three biggest losers in the Dow were Apple, Salesforce, and Microsoft. The stocks were down 5.1%, 4.9%, and 4.4%, respectively, by late morning.

Shares of all three have logged exceptional years so far. Apple stock has soared nearly 70% since the start of 2020, buoyed by surprise sales growth during the worst of the pandemic. Salesforce stock has jumped over 60%, with a big chunk of that gain coming after an earnings report in August that beat expectations. And Microsoft stock is up around 40% thanks to the strength of its cloud computing businesses.

While the three tech giants have been performing well, valuations have become stretched. Apple and Microsoft trade for just below 40 times earnings, and Salesforce trades for over 100 times earnings. For comparison, the S&P 500 sports a price-to-earnings ratio of 30. Only during the dot-com bubble and the financial crisis has the index carried a higher earnings multiple.

When valuations become detached from the fundamentals, stocks can soar to dizzying heights and crash to stomach-churning lows independent of the underlying companies' results. One bad day doesn't mean these high-flying tech stocks are destined to plunge, but the enthusiasm for these pricey investments may be beginning to wane.

All three companies will face challenges in the coming months. Apple's success during the pandemic was almost certainly due in part to unprecedented economic stimulus measures putting cash into consumers' pockets. Direct payments to Americans, an extra $600 weekly unemployment payment, and vastly lower spending on travel and restaurants no doubt boosted demand for iPhones and other Apple gadgets.

While another stimulus bill may come eventually, it will likely be far less generous than the CARES Act. Apple will be launching new iPhones soon into the worst economy in many years. It's hard to imagine demand for high-end smartphones holding up.

Salesforce and Microsoft are both exposed to IT budgets being tightened in a tough economy, although neither company has experienced much pain so far. Salesforce is a subscription software company, so its recurring revenue streams may prove more robust than one-off software sales. But even a subscription business model won't protect Salesforce if a meaningful number of its customers downsize or fail during the recession.

The story is much the same for Microsoft. Sales of Office, Windows, and cloud services could suffer if businesses tighten their belts. On the consumer side, a boom in PC sales during the pandemic is unlikely to be the new normal.

While the rally in tech stocks may not be over, Thursday's rout offers investors a reminder that stocks can move in two directions.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Microsoft, and Salesforce.com and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$150.77 (0.23%) $0.34
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$237.45 (-0.20%) $0.47
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$146.32 (-0.47%) $0.69
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$29,260.81 (-1.11%) $-329.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.