The market's biggest names fall hardest

The S&P 500 has fallen ten per cent from its recent high, the textbook definition of a correction. Speculative small companies and shaky cyclical borrowers did not lead the decline. The market's most admired giants did. The handful of mega-cap technology stocks that had carried global benchmarks to record levels have been marked down harder than at any point in this cycle.

The speed is part of the story. The index set its record on February 19th and closed in correction territory on March 13th, a fall of ten per cent in barely three weeks. The Nasdaq Composite, heavier still in technology, got there first, and on March 10th it suffered its worst single session since 2022. Tesla, the most volatile of the group, has lost roughly half its value since its December peak.

How the leaders stumbled

The cracks appeared before the tariff headlines. In late January a Chinese start-up, DeepSeek, released an AI model that it said had been trained at a fraction of the cost of American rivals. Nvidia lost close to $600 billion of market value in a day, the biggest one-day loss for any company in American history. The episode planted an awkward thought: if cheaper models could do the job, the hundreds of billions being spent on chips and data centres might earn less than investors had assumed.

Trade policy then did the rest. The White House imposed tariffs of 25 per cent on many imports from Canada and Mexico in early March, suspended part of them days later, and put 25 per cent duties on all steel and aluminium imports on March 12th. Broader "reciprocal" tariffs are promised for April 2nd. Consumer confidence surveys have weakened, and officials have declined to rule out a recession. Each reversal made it harder for companies to plan and for investors to price.

Selling what can be sold

When a few huge technology firms dominate an index, passive funds and systematic strategies keep buying them and put a soft floor under their valuations. That support runs in reverse once worries about growth meet ballooning AI capital spending and more regulatory trouble. Fund managers who need to cut their equity exposure cannot easily sell thinly traded small caps. They sell their biggest and most liquid winners to raise cash.

The mechanics amplify one another. Volatility-targeting funds and trend-following commodity trading advisers cut exposure mechanically as price swings widen, and they cut hardest in the futures and stocks that are easiest to trade. Hedge funds that crowded into the same technology names face margin calls as prices fall, and must sell again. An index-tracking investor who puts new money into an S&P 500 fund is buying these firms in proportion to their size, so when flows turn negative the largest weights absorb the largest outflows. Concentration that looked like safety on the way up behaves like leverage on the way down.

Thirty times earnings looks rich

Multiples of thirty times forward earnings assumed that revenue would compound smoothly and margins would keep widening. With growth cooling and companies trimming software budgets, those multiples are likely to keep falling. The arithmetic is unforgiving. A stock on thirty times earnings that falls to twenty-five times loses a sixth of its value even if profits do not move at all, and if profit forecasts are cut at the same time the two effects compound.

Capital spending is the other pressure on those multiples. Microsoft, Alphabet, Amazon and Meta have between them signalled capital budgets of more than $300 billion for this year, most of it for AI infrastructure. Investors tolerated the bill while revenue growth kept pace. As growth slows, depreciation on all those servers and buildings will start to weigh on reported margins, and free cash flow, the figure that justified the premium, shrinks while the payback remains a promise.

Echoes of 2000 and 2022

There are precedents for leaders becoming laggards. The Nifty Fifty, the reliable blue chips that fund managers held regardless of price in the early 1970s, fell far harder than the market in the bear market of 1973-74. The technology leaders of 2000 took years to recover their peaks, and some never did. The closer comparison may be 2022, when rising rates pushed the S&P 500 down by about a quarter from its January peak and the mega-cap technology stocks fell further still, before the AI boom revived them.

The differences matter. Today's giants are enormously profitable, carry little net debt and generate cash that the loss-making dotcoms of 2000 never did. That argues against a collapse on the scale of the early 2000s. It does not protect them from a derating, which is what happens when the price paid for each dollar of profit falls back towards the market average.

The case for a quick rebound

The strongest counterargument is that nothing has yet gone wrong with the businesses themselves. Nvidia's latest quarterly results, published in late February, again beat forecasts, and the cloud divisions of the big platforms are still growing fast. Corrections of ten per cent are common and usually do not become bear markets unless a recession follows. If the tariff threats prove to be bargaining tactics and are withdrawn, buyers could return as quickly as they left.

That case depends on policy clarity that has so far been missing, and on a Federal Reserve willing to cushion the fall. The central bank meets on March 18th and 19th and has signalled patience, not rescue, because tariffs threaten to push prices up just as growth slows. Watch the April tariff announcement, the first-quarter earnings season that begins in mid-April, and above all whether the big platforms trim their capital spending guidance. A cut would ease the pressure on margins but would also confirm that the AI boom is cooling.

Winners in a narrower market

Not every part of the market has suffered equally. Defensive sectors such as consumer staples, utilities and health care have held up far better, and an equally weighted version of the S&P 500, in which each company counts the same, has fallen less than the cap-weighted index. European shares, helped by Germany's plans to borrow for defence and infrastructure, have outperformed American ones by a wide margin since January. Investors who spent two years complaining that they could not beat an index dominated by seven stocks are finding that diversification has started to pay again.

The same heavy concentration that powered the long bull market is now driving the selling, and the biggest technology stocks will probably keep leading the index lower for as long as the growth scare lasts. Unless the April tariff decisions bring genuine relief, expect the mega-caps to trail the rest of the market through the spring, with passive investors, whose portfolios are most heavily loaded with them, bearing the largest share of the losses.