The searing monthslong rally in the stock market has been a clear sign that investors expected the country’s giant tech firms to help lead the pandemic-hit economy out of the doldrums.
Now investors appear to be having second thoughts.
After a big drop on Thursday, stocks fell Friday, leaving the S&P 500 stock index down 4.3 percent since Wednesday, when it hit the latest in a series of highs. The tech-heavy Nasdaq composite has fallen 6.17 percent since its peak on Wednesday — its worst two-day performance since March.
Over the two days, Apple was down nearly 10 percent — and that’s after it was up slightly on Friday. The two-day tumble also hit Google’s parent company, Alphabet (down 7.9 percent), Microsoft (7.5 percent) and Amazon (6.7 percent).
It could have been worse: The S&P 500 was down as much as 3 percent on Friday morning, but rallied in the afternoon and finished down just 0.8 percent.
Market watchers had been anticipating some kind of sell-off, given that the S&P 500 has soared over 50 percent from its low in March. “You knew you had one of these coming at some point, perhaps more than one,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “The moves upward, especially in the last few days, were something.”
The S&P 500 is up 6 percent for the year and 60 percent since Donald J. Trump was elected president in 2016. But the wild ride at the end of week is prompting questions about some of the underpinnings of the rally.
One of the drivers has been confidence that the economy, injected with government stimulus, could steadily recover as coronavirus outbreaks waned. But employment data released Friday showed that the pace of rehiring has slowed, and the economy may find it harder to heal if a standoff over further stimulus persists in Washington.
Some analysts say rampant speculation in a handful of large tech stocks had pushed the market so high that it became divorced from the still-grim economic reality on the ground.
“In the past five months, there’s been no correlation between the stock market and the economy,” said David Rosenberg, chief economist and strategist at Rosenberg Research & Associates.
The form that speculation has taken may have added to the fragility in the market.
In recent months, investors have bought large amounts of a financial instrument that enables them to bet on stock prices without investing as much money as when buying actual stocks. Analysts say the greater use of these instruments, known as options, helped push tech stocks to new heights.
The Financial Times reported on Friday that SoftBank, a Japanese conglomerate that has a history of making large, risky investments, had been a big buyer of options linked to the rising tech stocks. SoftBank declined to comment to The New York Times.
In fact, many investors have been buying up these options in recent months, said Matthew J. Maley, chief market strategist at Miller Tabak. That causes the financial firms which arrange the options trades to buy the underlying shares to hedge their risks.
As a result tech stocks kept moving higher, convincing investors that they were a sure bet. “People got too confident,” Mr. Maley said. “It was a kind of can’t-lose situation.”
The question now is whether falling prices could prompt options investors to liquidate their bets, setting off more selling. Since the stocks of Amazon, Alphabet, Microsoft, Apple and Facebook have accounted for a large share of the stock market’s gains this year, a rout in their shares could pull down the market over all.
Stocks can be more at risk of a plunge if investors perceive them to be overvalued. On a valuation yardstick known as the price-to-earning ratio, which compares the price of stocks to companies’ profits, the stock market looks expensive. Combined, the companies in the S&P 500 index are trading at a price-to-earnings ratio that is well above the average of the last 30 years, Mr. Paulsen said.
The appearance of overvaluation has occurred in the past, he noted, when earnings were depressed by a weak economy. And instead of falling into a prolonged slump, stocks rallied. “I think that’s going to happen here,” Mr. Paulsen said.
But other analysts think there is a lot more trouble ahead.
“The market is buckling under the weight of its own egregious complacency, overvaluation and market concentration,” said Mr. Rosenberg, the economist and strategist.
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