• Worsening tensions between US and China have weighed on investor sentiment
  • Despite recent drops, major indexes remain in posituve territory for the year
  • Semiconductor stocks were especually hit hard on Tuesday

U.S. stocks plummeted Tuesday, with the tech-heavy Nasdaq leading the downward move in a continuation of last week's correction.

The Dow Jones Industrial Average plunged 631.42 points, or 2.25%. The S&P 500 dropped 95.12 points, or 2.78%, and the Nasdaq Composite tumbled 465.44 points, or 4.11%.

Since Wednesday's close, the Nasdaq has fallen 10%.

Facebook (FB), Amazon (AMZN), Microsoft (MSFT), and Google-parent Alphabet (GOOG) all dropped Tuesday by more than 3.5%, while Apple (AAPL) plunged 6.73%. Electric carmaker Tesla (TSLA) sank 21.06% after S&P did not include the company in its S&P 500 index rebalancing.

“High valuations in the mega-cap stocks are stretched far beyond historical levels,” said Bruce Bittles, chief investment strategist at Baird, reported CNBC. “The technical indicators – high margin debt, fully invested mutual funds, [Chicago Board Options Exchange] options data showing record call volume… [all point] to excessive optimism in the market which often suggests a consolidation/correction phase is likely.”

As U.S.-China relations worsened, semiconductor stocks saw big declines. Nvidia (NVDA) dropped 5.62%, while Micron Technology (MU) fell 3.12%, and Applied Materials (AMAT) plunged 8.74%. Advanced Micro Devices (AMD) dropped 4.05%.

“Stocks are lower for the third consecutive session on Tuesday, as last week’s sell-off in technology shares deepens,” said Wells Fargo Advisors. “Simmering tensions between the world’s two largest economies are also weighing on the mood. President Trump suggested that the U.S. could ‘decouple’ from China, pushing to end its economic reliance on Beijing, while also warning American companies against creating jobs overseas.”

Many analysts have worried the markets have become wildly overvalued after a massive rally from March lows.

“Given how extreme many of the indicators we follow had become by early this past week, we believe it will take more than just a mild decline to work off those conditions,” Matt Maley, chief market strategist at Miller Tabak, wrote Sunday in a note. “Therefore, we still believe a correction of more than 10% is probable.”

Liz Ann Sonders, chief investment strategist, Charles Schwab & Co., tweeted on Tuesday: “Market’s selloff jolted by tech makes sense considering sector’s weight. [Year-to-date], its market cap has increased by [$2.4 trillion], while energy [and] financials -- best performers during the recent rout -- have shed over half a trillion [dollars in market cap.]”

In late August, Sonders warned of high market valuations. “I worry about the signs of froth in the market and among some behavioral measures of investor sentiment; not to mention traditional valuation metrics that are historically stretched,” she wrote. “This is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing.”

David I. Kass, clinical professor of finance at the University of Maryland, told International Business Times that Tuesday’s decline marked a “continuation of last week's decline which followed a very sharp increase over a short period of time.”

“There is some profit-taking and perhaps an unwinding of the options trades made by Softbank,” Kass said, referring to the Japanese conglomerate which made huge bets on some U.S.-based mega-cap tech stocks earlier this year.

Callie Cox, a North Carolina-based investment strategist at Ally Invest posted on Twitter: “This has been quite the selloff but remember -- we scaled the mountain to record highs pretty quickly.”

Cox noted that the major indexes are still way up for the year, but conceded that “context doesn’t make the market action any less painful.”

“But declines like these happen all the time, and they’re healthy for the market in the long run,” she added. “You gotta stumble sometimes before you walk.”

Andrew Smith, chief investment strategist, Delos Capital Advisors, based in Dallas, told IB Times: “While today's market pullback is a bit more broad-based than last Thursday and Friday, we still see the continued unwind in the defensive/stay-at-home positions in favor of economic beneficiaries, on a relative basis.”

Smith added that although seasonality and political uncertainty remain tailwinds, “we believe adding exposure during these pullbacks towards industrials, materials, and raw commodities remain the investment strategy game plan.”