Nasdaq witnessed a bloodbath on Wednesday with its 100 Index seeing a rout of $1 trillion as investors, soured on the promise of artificial intelligence (AI), resorted to large-scale selling of major tech shares.
Concerns over just how long it will take for the substantial investments in the technology to pay off were reportedly behind the major sell-off.
The Nasdaq indexes tumbled more than 3 percent for the worst day since October 2022.
The list of laggards was a who’s-who of AI technology darlings, led by semiconductor companies such as Nvidia, Broadcom and Arm Holdings.
The sell-off was triggered by a middle-of-the-road earnings report from Alphabet late Tuesday that featured a bloated capital expense, Bloomberg reported.
The company’s stock sank more than 5 percent for its worst performance since January.
Tesla plunged more than 12 percent after CEO Elon Musk offered scant details about his company’s self-driving vehicle initiative.
The overarching concern is, where is the ROI on all the AI infrastructure spending?” said Alec Young, chief investment strategist at Mapsignals.
“There’s a pretty insane amount of money being spent. Maybe it will pay off in a few years. But I think investors realise that the payoff is going to take time to materialise and the hyper scalers earnings are being hurt in the short term by how much they’re spending on it,” Bloomberg quoted Young as saying.
As a result, traders are now paying more to protect against swings in tech.
Options volatility on Nvidia rose to the highest level since mid-March, and the premium for puts on Broadcom is at a three-month high.
The rout comes two weeks after a cooler-than-expected inflation reading set off a massive rotation from tech winners into companies that would benefit most from Federal Reserve rate cuts, primarily small capitalisation stocks.
For a fourth straight session – and the 10th time in 11 days – small caps’ performance exceeded that of their larger brethren on Wednesday.
The Russell 2000 is up 0.5 percent this week compared with a loss of 1.5 percent in the S&P 500 and 2.6 percent in the Nasdaq 100.
While the rotation from tech remains on display, the moves in tech were violent enough to suggest something else was at play.
Specifically, investors appear to be listening to growing chatter in some Wall Street circles that the AI rally that fuelled a bubble that added $9 trillion in value to the S&P 500 in the past year is bound to burst.
While Wednesday may not mark the start of that, the magnitude of the drop raises alarms.
“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,” said Neville Javeri, portfolio manager at Allspring Global Investments.
The makers of hardware used in AI computing suffered some of the biggest drops on Wednesday after soaring this year.
Super Micro Computer dropped 9.15 percent. Nvidia fell 6.8 percent, and Broadcom lost 7.6 percent. Megacaps also retreated, as Meta Platforms declined 5.6 percent, Microsoft slid 3.6 percent, and Apple dropped 2.9 percent.
Other traders, however, saw the moves as temporary.
“I don’t think you are 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,” said Michael Sansoterra, chief investment officer at Silvant Capital Management.
The sell-off sent a Bloomberg index of the so-called Magnificent Seven technology stocks down 5.9 percent, falling below its average price for the past 50 days for the first time since May. It remains up 33 percent since the start of the year.
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