The recent tech stock selloff has raised concerns about Wall Street's vulnerability to a potential downturn in the Big Tech trade, prompting investors to reconsider their portfolio composition.

What Happened: The market experienced a selloff triggered by disappointing quarterly reports from Tesla Inc. (NASDAQ:TSLA) and Google-parent Alphabet Inc. (NASDAQ:GOOGL), causing the tech-heavy Nasdaq Composite to drop 3.6% in its worst day since October 2022.

Senior portfolio manager at GLOBALT, Thomas Martin, indicated that Tesla's results served as a wake-up call for investors who realized their portfolios were heavily weighted towards information technology and growthier type companies, Reuters reported.

"This was the hair trigger for people saying, 'Wow, I've got way too much exposure to information technology and growthier type companies,'" he said.

"The trade ... is to get more diversified."

Jake Dollarhide, chief executive officer of Longbow Asset Management, added, "We set the bar too high on earnings. Even Alphabet's earnings beat, but the market obviously wasn't impressed and they didn't beat by enough."

The selloff follows a prolonged rally in tech and growth companies, including Nvidia Corp. (NASDAQ:NVDA), Microsoft Corp. (NASDAQ:MSFT), and Amazon.com Inc. (NASDAQ:AMZN), driven by optimism about artificial intelligence technology. These megacap stocks, along with Meta Platforms Inc. (NASDAQ:META) and Apple Inc. (NASDAQ:AAPL), have accounted for approximately a third of the S&P 500's 14% gain in 2024.

However, as share prices soared, concerns grew over companies' stretched valuations, drawing comparisons to the dot-com bubble of more than two decades ago. The S&P 500 is trading near 22 times expected earnings, its highest in over two years, and well above its 10-year average of 18.

Signs of nervousness around tech stocks have been evident in recent weeks, with hedge funds reducing their market exposure amid fears that gains from earlier this year could evaporate if sentiment around tech stocks changed.

However, some like Tim Ghriskey, senior portfolio strategist at New York-based Ingalls & Snyder, feel the pullback is a short-term phenomenon and could reverse "if we see some good numbers in the coming days."

Why It Matters: The recent tech selloff has had a significant impact on key tech suppliers. For instance, South Korea's SK Hynix, a major supplier to NVIDIA, saw its stock drop nearly 8% following the U.S. tech sell-off, despite reporting its highest quarterly profit since 2018.

The disappointing earnings from mega tech companies have wiped out over $570 billion in their combined market valuation, with Tesla shares plummeting over 11% after missing earnings expectations.

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