By Michael Wursthorn

Spring hasn't been kind to stock-market highfliers.

The sectors that benefited most from the pandemic-inspired shift to working from home have fallen hard since late January, as rising interest rates pushed investors into investments promising surer returns. Hot technology firms and blank-check merger companies have tumbled from their highs, pushing the Nasdaq Composite Index down 8% from its latest record close last month.

Exercise bike maker Peloton Interactive Inc. is off 38% from its mid-January high, partly reversing its fivefold gain last year. Virtual-care services provider Teladoc Health Inc., which more than doubled last year, has slid 42% from its mid-February high. Tesla Inc., possibly the most prominent beneficiary of last year's stimulus trade, has shed roughly $244 billion in market value since Jan. 25.

But the carnage hasn't been limited to tech. Lately, the firms that were supposed to benefit from the economy's reopening have slumped too. The Russell 2000 index of smaller stocks has fallen 7.5% from its March 15 high. Tupperware Brands Corp. has fallen 35% from its Jan. 11 high after more than doubling last year. Watchmaker Fossil Group Inc., up 173% between the end of December and Jan. 27, has fallen 52% from its high.

The pullbacks are noteworthy at a time when the broad market indexes continue to trade near record highs. Many portfolio managers believe the outlook for stocks remains good, with the economy expanding at a healthy clip, U.S. vaccination efforts gaining momentum and interest rates still very low.

Some traders worry that the double retreat shows the reopening trade has been driven by speculative fund flows just as much as the earlier tech boom was. Investors have plowed $11.5 billion into U.S. large cap value exchange-traded funds so far this year, versus nearly $4 billion in outflows from similar growth funds, according to FactSet. The biggest beneficiary of those inflows has been Vanguard's Value Index Fund, whose top holdings include stocks closely tied to the economy, including JPMorgan Chase & Co., Coca-Cola Co. and Walmart Inc.

A further unwind of speculative stock trades, both in technology and in so-called value sectors, could hit harder in coming weeks and potentially weigh on the rest of the market, some analysts contend.

After their long run-up, many once-hot stocks are "very vulnerable to a continued correction," said Andrew Slimmon, managing director and portfolio manager at Morgan Stanley Investment Management. He said multiples remain stretched even after recent selling.

Conditions couldn't have been much better for growth stocks last year. The collapse of interest rates made investors willing to wait well into the future for potential profits, while the coronavirus pandemic boosted the outlook for companies that were in a position to provide in-home entertainment or help people stay connected virtually.

But the rise of Treasury yields as the economy reopens means future cash flows become less valuable relative to current ones, accelerating the shift toward real-economy stocks like retailers, manufacturers and banks. Economists surveyed by The Wall Street Journal predict economic growth will accelerate 5.95% this year, the fastest pace in nearly four decades.

Even after the recent selloff, a lot of investors continue to hold a significant chunk of their assets in growth stocks, meaning further selling could be ahead, analysts said.

Hedge funds remain more exposed to tech stocks than the other 10 major stock sectors, with tech accounting for around 22% of the typical fund, according to a recent Goldman Sachs report. Typical value holdings, including financial and industrials, were less than half of that.

"Institutional investors still haven't embraced the value trade," said Mr. Slimmon.

Another area investors appear to be losing interest in is shares of special-purpose acquisition companies. Shares of many SPACs have taken a substantial hit this year. That is because many of the reverse-merger targets of these companies are unprofitable, said David Lefkowitz, head of equities for the Americas at UBS Financial Services.

Virgin Galactic Holdings Inc. has fallen 66% from its February high after doubling in 2020. Churchill Capital Corp. IV is down 65% from its Feb. 18 high after earlier quintupling from its initial offering price.

Portfolios loaded up with these stocks have suffered big losses. ARK Investment Management LLC's flagship ARK Innovation ETF is down 29% from its Feb. 16 high after more than doubling last year.

On the flip side, the reopening trade is starting to look similarly volatile. Small businesses are more tied to the domestic economy than bigger companies, and many of the constituents of the Russell 2000 are cyclical companies that were battered last year. The onset of the reopening trade took the Russell, the main small-cap index, up 31% in the fourth quarter alone.

Bank of America said positioning leading up to the sector's March pullback was the most bullish since February of last year and September 2018. Morgan Stanley cut its view on small-caps, though UBS said it remains bullish.

"Vaccines are being administered at an accelerating pace and another large fiscal package has recently been passed," likely boosting earnings growth and share prices at smaller companies ahead of bigger businesses, UBS strategists said.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

03-29-21 0544ET