Why tech stocks are getting hammered ahead of Trump's tariff deadline

• Investors are selling tech stocks ahead of Trump's Wednesday tariff deadline
• The Nasdaq 100 fell 7% in four days, with mega-cap tech stocks down 10%.
• Hedge funds are driving the tech sell-off, with concerns over valuations and earnings.

Investors are fleeing technology stocks ahead of President Trump's tariff deadline on Wednesday.

The Nasdaq 100 is down 7% in just four trading days, and the damage has been even worse for the mega-cap tech giants, with an equally weighted basket of the "Magnificent 7" stocks declining about 10% since last Tuesday.

Hedge funds derisk in momentum unwind

The swift price decline speaks to a broader unwind in Wall Street's momentum trade as investors shed risk amid increasing economic uncertainty, which is set to crescendo on April 2 when Trump is expected to unveil a long list of new tariffs.

The easiest way for investors to shed risk is to sell some of their largest positions, which mega-cap tech stocks have dominated in recent years.

That's evidenced by the fact that even though tech is seen as having limited exposure to tariffs, it's underperforming sectors that are more at risk of pain from the trade war.

In the past week, consumer discretionary stocks have dropped 5%, industrial stocks declined 3%, and consumer staples stocks jumped 3%.

According to data from Goldman Sachs' trading desk, a lot of the selling in the tech sector has been driven by hedge funds, with the group selling down their tech exposure at the fastest pace in six months.

The notional value of tech's decline is the second largest over the past five years, according to the bank, and some of the selling volume is related to fresh short positions being taken.

Risks include high valuations, earnings drop

While the tech sector may have limited exposure to Trump's tariffs, the tariffs themselves could be waking investors up to other risks in the sector.

Those include elevated valuations, the potential for interest rate hikes if inflation accelerates, and concerns about declining earnings if the economy slows.

The tech sector trades at a forward price-to-earnings ratio of 25x, well above the S&P 500's 20.5x multiple, according to data from Factset.

According to Brent Thill, an equity analyst at Jefferies, the DOGE government cuts also serve as an overhang for the sector, with Accenture being the latest company to highlight the cuts as a headwind.

Thill cut his price targets for five software stocks on Monday. Microsoft went to $500 from $550, Amazon to $250 from $275, Meta Platforms to $$725 from $810, Alphabet to $200 from $235, and Snowflake to $190 from $220.

According to Thill, macroeconomic uncertainty is pausing deal flow in the tech sector and could also lead to a slowdown in advertising spending.

"You've obviously had a tremendous amount of concern over DOGE, you had many companies talk that they're seeing an uncertain environment including Accenture, Lulu and Fedex, so we think that it would make sense that these deals could be delayed into the back half of the year," Thill told CNBC on Monday.

AI still needs to deliver revenues and profits

Thill said most of his clients are in "wait and see mode" when it comes to buying software stocks because the AI profits have yet to deliver.

"We've got to see the ROI on some of these initial investments," Thill said, adding that until profits are realized, future spending on AI could come to a standstill.

"We have to see AI revenue come in, and we're at 1% to 3% of the software industry of total revenue is AI today, it's tiny," Thill said.