Wall Street Highlights: S&P 500 Sinks 4%, Nasdaq Tumbles As AI Washout Rattles Markets

In its worst session since March 2020, the Nasdaq 100 sank 6.4%, wiping out $2.3 trillion in value. The S&P 500 fell 4.4%. A key gauge of chip giants tumbled 12%. Qualcomm Inc. and Arm Holdings Plc's sank on underwhelming outlooks. Apple Inc. raised $7.5 billion from its high-grade bond offering, adding to a flurry of tech issuance. Tesla Inc. and SpaceX slid at least 9%.

Wall Street's selloff easily erased a rally on Wednesday, when the sweep of Congress by Democrats sent oil sharply lower on bets the election would speed an end to the Iran war. But even as broad stock benchmarks soared in that session, signs of unease toward the AI trade were evident.

The data-center slowdown due to the political shift is going to be real, and the earnings estimates behind the valuations that were the cornerstone of bullish arguments are no longer valid, according to Michael O'Rourke at JonesTrading.

Also Read | Layoffs Are Rising In Tech, But These Skills Are Helping People Unlock Better Pay

ALSO READ | Asian Markets Today: Nikkei Enters Bear Market, Kospi Crashes 9%; What Triggered The Global Sell-Off?

"Investors have no idea where those estimates will reset," he said. "As a result, they are de-risking until clarity returns, which won't be for some time."

A rotation toward defensive sectors morphed into a broader equity rout, with a gauge of volatility spiking. Bitcoin sank. In a rush for safety, bonds rose despite higher oil prices. Fading enthusiasm for investment in the AI buildout prompted investors to trim bets on Federal Reserve hikes.

Michael Burry, who made his name shorting the US housing market, said he sold 25% of his put positions in the $58 billion VanEck Semiconductor ETF amid a deepening rout in US technology stocks. "The SMH put positions even after the sale however have become very large positions," he wrote.

Thursday's action is what happens when euphoria and hype become the reason why stocks go up, rather than fundamentals, according to David Bahnsen at The Bahnsen Group. The rout is also an important reminder the S&P 500 is "way too concentrated" in tech stocks, he added.

Where this differs from a regular selloff is that we are not seeing recoveries after significant losses, such as Intel Corp. falling further this week even after plunging almost 30% Friday, according to Jakub Rochlitz at eToro. There's also increasing cross-sector correlation and a rise in volatility, meaning that the rout is spreading across the market.

"The all-or-nothing mentality is surprising to us, because we believe the real truth is more nuanced," said Chris Zaccarelli at Northlight Asset Management. "We do agree that sentiment has shifted and building data centers will become more difficult, but if there is a productive business case for building them, then they will get built."

Wavering AI optimism is affecting rates through expectations for growth and Fed policy - neither of which will depend much on Friday's jobs report, according to Will Compernolle at FHN Financial.

"If there truly is a sharp pullback in AI investment, the labor market impacts could be minimal - the capital intensity has meant few jobs added during the surge, so likewise few should be lost through any decline," he said. "If an investment pullback eventually ripples into the broader economy through financial contagion, it won't be revealed tomorrow."

ALSO READ | Stock Picks Today: Hindalco Novelis, Bharti Airtel, LIC, Bharat Forge, And More On Brokerages' Radar

Some of the main moves in markets:

Stocks

• The S&P 500 fell 4.4% as of 4 p.m. New York time
• The Nasdaq 100 fell 6.4%
• The Dow Jones Industrial Average fell 3.4%
• The MSCI World Index fell 3.3%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.1% to $1.1216
• The British pound fell 0.2% to $1.3447
• The Japanese yen rose 0.4% to 157.79 per dollar

Cryptocurrencies

• Bitcoin fell 5.4% to $75,809.84
• Ether fell 7.5% to $2,234.54

Bonds

• The yield on 10-year Treasuries declined six basis points to 4.83%
• Germany's 10-year yield declined three basis points to 3.24%
• Britain's 10-year yield was little changed at 5.13%

Commodities

• West Texas Intermediate crude rose 2.7% to $90.54 a barrel
• Spot gold rose 0.5% to $4,082.01 an ounce.