AI Frenzy Cools, Sending Nasdaq 100 Plummeting by US$1 Trillion
Investor sentiment sours on AI, leading to a US$1 trillion Nasdaq 100 decline. Alphabet Inc.'s earnings report triggers market sell-off. Concerns arise over the ROI of AI infrastructure investments.
Doubts emerged regarding the timeline for the substantial investments in AI to yield returns, leading to a significant sell-off.
The Nasdaq indices experienced a more than 3% drop, marking the worst performance since October 2022. Among the notable casualties were key players in AI technology, including semiconductor giants like Nvidia Corp., Broadcom Inc., and Arm Holdings Plc.
The downturn was instigated by Alphabet Inc.'s lukewarm earnings report released late Tuesday, revealing inflated capital expenses. Consequently, Alphabet's stock plummeted over 5%, marking its most significant decline since January. Tesla Inc. also took a hit, plunging over 12% after Elon Musk, the CEO, provided limited insights into the company's self-driving vehicle project.
Alec Young, Mapsignals' chief investment strategist, highlighted the overarching concern surrounding the return on investment in AI infrastructure spending. The substantial capital poured into AI initiatives is raising questions about when the payoffs will materialise, with current spending impacting the short-term earnings of major tech companies.
Traders are now opting for increased protection against tech market fluctuations. Options volatility for Nvidia surged to its highest level since mid-March, while the demand for puts on Broadcom Inc. reached a three-month peak.
The recent market turmoil follows a shift triggered by lower-than-expected inflation data, prompting a significant rotation from tech stocks to firms anticipated to benefit from potential Federal Reserve rate cuts, particularly small-cap stocks. Small-cap stocks have outperformed their larger counterparts for the fourth consecutive session, with the Russell 2000 showing a 0.5% increase this week compared to losses in the S&P 500 and Nasdaq 100.
Despite the ongoing rotation, the abrupt and severe movements in the tech sector suggest underlying concerns beyond mere market dynamics. Speculation is growing within financial circles that the AI rally, which has inflated the S&P 500 by US$9 trillion in the past year, might be on the verge of a correction.
The sell-off impacted hardware manufacturers crucial for AI computing, with companies like Super Micro Computer Inc., Nvidia, and Broadcom Inc. witnessing substantial declines. While some view these fluctuations as temporary profit-taking, others are wary of the broader implications for the tech sector.
In the wake of the sell-off, a Bloomberg index tracking the top seven tech stocks dropped by 5.9%, falling below its 50-day average for the first time since May. Despite this decline, the index remains up by 33% since the beginning of the year.
Investor sentiment sours on AI, leading to a US$1 trillion Nasdaq 100 decline.
Alphabet Inc.'s earnings report triggers market sell-off.
Concerns arise over the ROI of AI infrastructure investments.
Source: YAHOO