What Happened?

A number of stocks fell in the afternoon session after investors showed signs of fatigue with the AI-led rally, rotating out of high-valuation growth names. 

After a fantastic run, many of the high-flying AI and technology stocks saw investors take profits: selling shares to lock in their gains. This is often called a "market rotation." Money is moving out of the red-hot tech sector (which some worry has become too expensive) and into other parts of the market that investors may currently deem more stable or reasonably-priced. There's a secondary reason for the cautious mood: The long government shutdown came to an end. Though it's typically interpreted as good news, it also means a flood of delayed economic reports will be released. For weeks, investors were "flying blind" without key updates on the economy's health, like inflation data and the jobs report. In typical "sell the news" fashion, investors may also be taking profits and selling in anticipation that the new data would potentially give the Federal Reserve reasons to slow or even pause future rate cuts.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.

Among others, the following stocks were impacted:

• Communications Platform company Twilio (NYSE: TWLO) fell 2.7%. Is now the time to buy Twilio? Access our full analysis report here, it’s free for active Edge members.
• Data Infrastructure company Confluent (NASDAQ: CFLT) fell 3.7%. Is now the time to buy Confluent? Access our full analysis report here, it’s free for active Edge members.

Zooming In On Confluent (CFLT)

Confluent’s shares are very volatile and have had 25 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was 9 days ago when the stock dropped 3.4% on the news that markets became increasingly wary of high valuations following a significant AI-driven rally. 

The tech-heavy Nasdaq fell approximately 1.4% as a wave of caution swept through the market. A key example of this trend is Palantir Technologies, which saw its shares drop around 7% despite reporting record quarterly results that surpassed analyst estimates and raising its full-year revenue outlook. This seemingly contradictory movement highlighted a broader sentiment shift. Investors appeared to be engaging in profit-taking, concerned that the recent surge in AI-related stocks had led to stretched valuations. This broader market caution affected high-growth technology companies that had previously surged on AI optimism but faced increased scrutiny, signaling a potential cooling-off period for the sector. Adding serious weight to this caution, leadership at both Goldman Sachs and Morgan Stanley highlighted the possibility of a correction in the equity markets over the next couple of years. Despite the euphoria driven by AI optimism and the promise of future rate cuts, these banks viewed this cooling-off period not as a disaster, but as a necessary and healthy feature of a long-term bull market.

Confluent is down 17% since the beginning of the year, and at $23.46 per share, it is trading 37.7% below its 52-week high of $37.65 from February 2025. Investors who bought $1,000 worth of Confluent’s shares at the IPO in June 2021 would now be looking at an investment worth $521.01.

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