The Nasdaq tumbled over 3% for its worst day since October 2022, with AI technology giants like Nvidia, Broadcom, and Arm Holdings leading the decline.
Alan Schein Photography/Getty
Investors soured on the promise of artificial intelligence Wednesday, sparking a $1 trillion (R19 trillion) rout in the Nasdaq 100 Index as questions swirled over just how long it will take for the substantial investments in the technology to pay off.
The Nasdaq indices tumbled more than 3% 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 selloff was triggered by a middle-of-the-road earnings report from Alphabet that featured a bloated capital expense. The company’s stock sank more than 5% for its worst performance since January.
READ: JSE to get its first cannabis listing
Tesla plunged more than 12% after chief executive Elon Musk offered scant details about his company’s self-driving vehicle initiative.
Alec Young, an investment strategist, asked:
The overarching concern is, where is the return on investment (ROI) on all the AI infrastructure spending?There’s a pretty insane amount of money being spent. Maybe it’ll 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
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.
Investors appear to be listening to growing chatter that the AI rally that fueled 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.
Neville Javeri, a portfolio manager, said:
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
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%. Nvidia fell 6.8%, and Broadcom lost 7.6%.
Megacaps also retreated, as Meta Platforms declined 5.6%, Microsoft slid 3.6%, and Apple dropped 2.9%.Other traders, however, saw the moves as temporary.
READ: Global stocks firm, bitcoin loses some oomph as Biden steps down
Michael Sansoterra, a chief investment officer, said:
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
AI Bubble Fears
Jim Covello, the head of equity research at Goldman Sachs Group, is among a growing number of market professionals who are arguing that the commercial hopes for AI are overblown and questioning the vast expense required to build out infrastructure required for the computing to run and train large-language models.
Talk of a bubble in AI names was fanned by activity in derivatives markets, where investors piled into bullish options on indexes and individual stocks, especially Nvidia, that acted as rocket fuel during the rally.
That sentiment shifted as the rotation from tech picked up speed, and potentially added to the downdraft Wednesday.
READ: Listings pipeline the best it’s been in 5 years, says JSE
While Alphabet’s results dimmed hopes that AI would be a bigger contributor to financial results for megacaps, investors have yet to hear from the rest of the cohort.
Microsoft is scheduled to report on July 30, followed by Meta Platforms, Apple and Amazon later in the week. Nvidia, the biggest beneficiary of AI spending, will be the last to report in August8.
“We are still holding onto our large-cap, quality, growth view,” said Cayla Seder, macro multi-asset strategist at State Street.
“Because even if there is trepidation around tech earnings, they are a more attractive option in terms of earnings growth and fundamental strength.”
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Recent Comments