The technology sector is witnessing a downturn as stocks continue to falter due to unimpressive earnings. expert has indicated that the unwinding of popular trades, which led to inflated valuations, has begun.

What Happened: The assumptions driving this year's global financial markets are being rapidly reassessed. Investors are scrambling to redeploy money amid growing doubt over the U.S. economy's outlook, leading to speculation that the Federal Reserve may implement faster or deeper rate cuts than previously planned, Bloomberg reported on Friday.

Investors have become skeptical about the payoff of technology companies' substantial investments in artificial intelligence. Consequently, shares of big winners such as Nvidia Corp. (NASDAQ:NVDA) and Broadcom Inc. (NASDAQ:AVGO) have been discarded.

"It does seem that an unwinding has begun of popular trades that brought valuations to stupid levels," Louis-Vincent Gave, CEO of Gavekal Research, wrote in a note to clients.

Torsten Slok, chief economist at Apollo Global Management, warned clients that "if the economy starts slowing down, the speed of the slowdown becomes essential. A faster slowdown would have negative implications for earnings and increase the probability of a selloff in stock markets and credit markets."

Government bonds are also experiencing a gloomier global growth outlook, prompting investors to snap up short-dated securities amid concerns that monetary policy is too tight, acting before borrowing costs decrease.

Stock markets have been driven this year by a consensus that inflation was coming under control, allowing the Fed to ease monetary policy later in the year and thus avoid a recession. Now, many investors believe that the Fed is falling behind the curve — not only is inflation quieting, but the economy is weakening too much.

Why It Matters: This downturn follows a tech stock selloff triggered by disappointing quarterly reports from Tesla (NASDAQ:TSLA) and Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG), causing the tech-heavy Nasdaq Composite to drop 3.6% on its worst day since October 2022.

Despite the selloff, CNBC Mad Money host Jim Cramer defended the performance of Tesla and Alphabet, stating that anyone who listened to their conference calls would know that these companies are performing extremely well.

The S&P 500 and the Nasdaq Composite concluded lower on Thursday, continuing the trend of significant losses from the previous session. Major tech companies, including Nvidia, Meta Platforms (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT), and Alphabet, all closed lower.

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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari