High-flying tech stocks were selling off hard on Thursday, driving the Dow Jones Industrial Average (^DJI 0.17%) 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 -1.92%), salesforce.com (CRM 1.65%), and Microsoft (MSFT 0.23%). 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.

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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.