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Gravity hits highflying tech stocks

For much of the past year, Tesla Motors seemingly could do no wrong in investors' eyes.

An early unbroken string of quarterly losses, ambitions to build a huge battery factory: no matter. Shareholders kept pushing the company's stock up, by about 50 percent this year.

Loveguli | Vetta | Getty Images

But on Friday, the market had second thoughts about its onetime darling, as Tesla shares tumbled nearly 6 percent.

That sudden turnaround played out again and again in the once-high flying technology and biotechnology stocks that propelled the markets for over a year. The Icarian tumble of beloved names, like NXP Semiconductor and the biopharmaceutical company Alexion, signals a potential shift in investors' belief in chasing eye-popping growth.

What remains to be seen is whether the damage has been contained, or even if these stocks have finally hit earth.

All that is apparent now is that many "momentum" stocks, those that had drawn buyers because of their ascending trajectories, ran out of steam on Friday. While the three major market indexes were down that day, the Nasdaq composite index fell by more than double the descent of the Standard & Poor's 500-stock index or the Dow Jones industrial average. The Nasdaq began to wobble a little before 11 a.m., and then commenced a full-on tumble, ending the day down 2.6 percent at 4,127.73.

Read MoreMarch tech losses burn hedge funds

Behind the index's plunge was its very nature as the home of many of the highest highfliers, whose valuations have soared to spectacular levels. Over all, the Nasdaq trades at 31 times the reported earnings of its constituent companies, or nearly twice the ratio seen with the S.&P. 500.

"There is concern that we could be at a near-term market peak," said Dane Leone, the head of United States market strategy for Macquarie. If that is true, he added, investors rightly worried about holding onto stocks that were correlated so closely with overall market performance.

For much of last year, shareholders favored rapid-growth stories, reflecting a hunger for high-risk, high-reward investments, especially as low interest rates kept bond investments relatively unpalatable. Technology companies, particularly Internet-based players, astounded with their booming businesses. And health companies, including technologists and biopharmaceutical drugmakers, showed promise with new products.

Illumina,a maker of sophisticated gene-sequencing technology and one of the highest fliers, jumped 173 percent in the year through last Thursday. And Facebook shares at their 52-week peak reached $72.59, nearly double their initial offering price from May of 2012.

Those performances have also driven the market for initial public offerings to heights untouched in the United States since the boom year of 2000, according to data from Renaissance Capital. Internet and biotechnology start-ups have rushed to claim public listings, especially given some rich performances by notable debutantes. FireEye, a noted cyber security firm, had at its height nearly quintupled its I.P.O. price of $20 a share since going public last September.

But momentum stocks rely on investor exuberance to continue their growth. And as that enthusiasm evaporated, so too did those once-magical gains. FireEye slid 8 percent on Friday; Illumina fell nearly 6.7 percent.

NXP Semiconductor, whose 35 percent rise from Jan. 1 through Thursday made it one of the best performers in the Nasdaq, tumbled 7.4 percent.

Few analysts agree on what spurred the sell-off, though Mr. Leone hypothesized that biotech companies suffered from pressure on the prices of their products,especially after Congress asked one drug maker, Gilead, how it could justify the $84,000 cost of its hepatitis C treatment Solvadi.

Not all was doom and gloom, even on Friday. GrubHub, the online food delivery company beloved by financial industry employees, survived a wild ride to close 31 percent over its offering price, at $34 a share. IMS Health, a major seller of prescription drug data, closed up 15 percent over its I.P.O., at $23.

And less-supercharged technology stocks suffered far less. Shares in Intel, for instance, ended Friday down just under 1 percent. Those in Oracle fell even less, closing down about 0.7 percent.

Analysts are of two minds over what will happen next. Some believe that if investors continue to flee these momentum stocks en masse, the damage could bleed over into seemingly unconnected companies. Mr. Leone of Macquarie said that because many of these growth companies are widely held in various indexes and exchange-traded funds, a continued plummet could hurt others in those bundles.

Read More Tech stock sell-off spreads to Asian markets

He says he remains skeptical that investors have finished their selling.

"It's hard to say that we're really done," he said. "There's no valuation support for these stocks right now."

One potential area that could be affected is the I.P.O. market, if the venture capitalists and private equity financiers who back many of the start-ups worry that they cannot get the sky-high valuations that had become the norm. Kathleen S. Smith, a principal at Renaissance Capital, noted last week that investors had been pushing back against pricing in some new stock issuances.

Nowhere was that more evident than with King Digital, the maker of the wildly popular Candy Crush Saga. The game maker priced its offering in the middle of March at $22.50, in the middle of its expected range, only to see the stock price sink below that almost immediately. King's shares fell again on Friday, sliding nearly 5 percent to $18.96.

But others cautioned against expecting broader damage to the market. Momentum stocks could continue to gyrate for some time, but the broader market should remain relatively unaffected, said Matthew L. Rubin, the director of investment strategy at Neuberger Berman. In fact, investors have already shown a flight to safer havens in value stocks.

Moreover, some of the sell-off could be tied to benign reasons, including investors wanting to cash in gains ahead of tax season.

"I think this was isolated in the momentum stock arena," Mr. Rubin said. "A pullback was sort of in order."

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