AI Jitters Trigger $1 Trillion Nasdaq 100 Rout: Worst Day Since 2022

Investors lost faith in AI’s promise, triggering a $1 trillion decline in the Nasdaq 100. Doubts emerged about when significant investments in AI technology will yield returns. Market turmoil reflects uncertainty over AI’s long-term value and profitability potential. Investors await clarity on AI’s ROI and growth prospects.

• Nasdaq Indices Drop Over 3% in Sharp Decline
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• AI Bubble Concerns

Nasdaq Indices Drop Over 3% in Sharp Decline

Tesla Inc. also took a significant hit, plunging over 12% following CEO Elon Musk’s vague comments regarding the company’s self-driving vehicle initiative. Market experts are now questioning the return on investment (ROI) of the vast amounts of money being poured into AI infrastructure. As Alec Young, chief investment strategist at Mapsignals, pointed out, “There’s a pretty insane amount of money being spent. Maybe it’ll pay off in a few years, but investors realize that the payoff is going to take time to materialize, and the hyper scalers’ earnings are being hurt in the short term by how much they’re spending on it.”

The market turbulence has led traders to increase their hedging strategies to protect against further swings in technology stocks. Options volatility on Nvidia has spiked to its highest level since mid-March, while the premium for puts on Broadcom Inc. is at a three-month high. This downturn comes on the heels of a rotation from tech stocks into companies that would benefit more from potential Federal Reserve rate cuts, primarily small-cap stocks.

For the fourth consecutive session and the 10th time in 11 days, small-cap stocks have outperformed their larger counterparts. The Russell 2000 index is up 0.5% this week, while the S&P 500 has lost 1.5%, and the Nasdaq 100 has declined by 2.6%. This divergence in performance reflects investors’ shifting sentiment towards smaller, more nimble companies that are positioned to weather economic uncertainty better than larger tech giants.

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The sentiment among investors appears to be one of cautious Optimism turning into cautious pessimism, particularly in relation to the significant investments made by Big Tech companies in AI. Neville Javeri, a portfolio manager at Allspring Global Investments, notes that “In the short run, there may be a little AI fatigue, just because some of these investments that the Big Tech companies have made in AI may not be paying off in the time period that investors had in mind.” This sentiment is reflected in the significant drops suffered by manufacturers of AI computing hardware, including Super Micro Computer Inc., Nvidia, and Broadcom Inc., who saw declines of 9.15%, 6.8%, and 7.6% respectively on Wednesday.

Megacaps, too, were not immune to the selling pressure, as Meta Platforms Inc., Microsoft Corp., and Apple Inc. retreated by 5.6%, 3.6%, and 2.9% respectively. However, not all investors are convinced that the recent declines signal a prolonged downturn. Michael Sansoterra, chief investment officer at Silvant Capital Management, argues that the moves may be temporary, stating, “I don’t think you’re seeing anything other than some stocks that have done exceptionally well, have very solid year-to-date returns, seeing some profit taking in the face of not getting a giant beat and raise out of Google.”

The overall impact of the sell-off was significant, sending the Bloomberg index of the so-called Magnificent Seven technology stocks down 5.9%, falling below its 50-day average price for the first time since May. Despite this decline, the index remains up 33% since the start of the year, indicating that while investors may be cautious, they are not yet fully convinced that the AI bubble is about to burst.

AI Bubble Concerns

Amid rising concerns, Jim Covello, Goldman Sachs’ equity research head, joins a chorus of market experts questioning the commercial viability and hefty infrastructure costs of AI. The talk of an AI bubble has intensified as investors piled into bullish options on indexes and stocks like Nvidia, fueling a rally. However, the tech sector’s rotation and bearish sentiment on Nvidia, with bearish puts outpacing calls by the most in five months, indicate a potential downturn. As tail-risk hedges for stock crashes surge, fears of an AI bubble are growing, prompting market professionals to reassess the vast expenses and inflated hopes surrounding artificial intelligence.

Notably, Nvidia commands a valuation of 36 times its projected earnings over the next 12 months, significantly outpacing the average 21-time multiple for the S&P 500. Even Apple and Microsoft, stalwarts of the tech landscape, are trading at over 30 times their estimated earnings. This elevated pricing has intensified the stakes for earnings reports during a period of anticipated slowdown in profit growth for tech giants.

The recent results from Alphabet dimmed hopes that AI would be a major contributor to financial results for megacaps, leaving investors eager for updates from the rest of the tech cohort. Microsoft Corp. is set to report on July 30, followed closely by Meta Platforms Inc., Apple Inc., and Amazon.com Inc. later in the week. Nvidia, the largest beneficiary of AI spending, will be the final major player to release its earnings on August 28.

As investors navigate these uncertain waters, there are conflicting views on the sustainability of tech stocks’ lofty valuations. Some analysts warn of an impending bubble, while others maintain a bullish stance, citing the underlying strength of these companies’ earnings growth and fundamentals. Cayla Seder, a macro multi-asset strategist at State Street, represents the latter view, stating, “We are still holding onto our large-cap, quality, growth view. Because even if there is trepidation around tech earnings, they are a more attractive option in terms of earnings growth and fundamental strength.”