Investors are bracing for further turmoil in the tech sector as top strategists warn that the recent sell-off in Big Tech stocks may be far from over. The Nasdaq 100 closed the week down 2.7%, extending its third consecutive week of losses, with the technology sector experiencing its largest single-day percentage drop since October 2022.

Factors contributing to the tech rout include concerns over Federal Reserve rate cuts, Tesla's disappointing earnings report, and apprehensions regarding Alphabet's aggressive AI spending spree. Megan Horneman, chief investment officer at Verdence Capital Advisors, highlighted that valuations in the tech sector were vulnerable to a correction due to high expectations for earnings and potential interest rate adjustments.

Horneman emphasized that the rotation out of Big Tech stocks signals the beginning of a broader "valuation correction." Investors have pivoted towards small-cap stocks, with the Russell 2000 posting weekly gains for the third consecutive week, marking its strongest three-week performance since 2022. The shift towards small caps has been notable, with the outperformance of the Russell 2000 over the Nasdaq 100 reaching historically significant levels, according to data from Bespoke.

Brad McMillan of Commonwealth Financial Network underscored the risks associated with lofty valuations in Big Tech companies and the necessity of sustained earnings growth to justify these levels. The threat of slower profit expansion, combined with escalating AI investments, presents challenges for the tech sector's momentum. Goldman Sachs warned that the current momentum reversal could endure unless Big Tech firms enhance their forward revenue guidance.

Analysts at Goldman Sachs, including David Kostin, raised concerns about the escalating investments in AI by major tech players such as Amazon, Meta, Microsoft, and Alphabet, without clear signals of imminent returns. Kostin highlighted a significant gap between the surge in AI spending and the growth in revenue forecasts, signaling uncertainty about the timeline for realizing returns on these investments.

Further analysis by market experts suggests that the S&P 500 and stocks in general may face additional selling pressure in the second half of the year. Historical data reviewed by Truist's Keith Lerner and BMO Capital Markets' Brian Belski points to potential corrections and challenges for the market amid frothy conditions and excessive focus on big-cap tech stocks.

The tech sector's fate hangs on upcoming earnings reports from key players like Meta, Amazon, Apple, and Microsoft. Any disappointments akin to those seen with Alphabet and Tesla could trigger more downward movement in the tech market. As investors remain cautious and market volatility persists, the tech sector braces for continued uncertainties and potential corrections in the coming months.