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A sell-off in US tech stocks extended into Wednesday as concerns that this year’s rally in artificial intelligence companies has gone too far dented sentiment on Wall Street.
The tech-heavy Nasdaq Composite was down 1.1 per cent, leaving the index on course for its worst week since Donald Trump’s tariffs triggered ructions this spring. The blue-chip S&P 500 lost 0.5 per cent on Wednesday.
Nvidia fell 1.5 per cent, Palantir Technologies dropped 2.5 per cent and Arm lost 2.8 per cent, after steeper falls in the morning.
Consumer staples, energy companies and healthcare stocks climbed at the same time as investors rotated into so-called value sectors at the expense of the racier tech names.
“Insatiable demand and capacity constraints propelled tech stocks to record highs,” said Laura Cooper, head of macro credit and global investment strategist at Nuveen. “Investors are now questioning the durability of the uptrend” because of “stretched valuations”.
On Tuesday, the Nasdaq Composite closed down 1.4 per cent, the biggest one-day drop for the index since August 1. The S&P 500 closed 0.7 per cent lower.
“We’ve seen everyone get a bit overexcited through results season,” said Neil Birrell, chief investment officer at asset manager Premier Miton. “The big question is the scale of the sell-off.”
“Nothing fundamental” had happened to change the earnings outlook for the sector in his view, he added.
Birrell said he would see deeper declines as an opportunity to “buy the dip” in stocks.
“AI is going to be revolutionary,” he said. “In any form of revolution there are periods of excitement and periods of worry.”
The declines come amid warnings that the hype surrounding AI could be overdone, after a study by a branch of the Massachusetts Institute of Technology warned in a new paper on Monday that 95 per cent of the companies polled had not seen returns on generative AI investments.
OpenAI chief executive Sam Altman acknowledged last week that some investors were “overexcited” about AI.
Marija Veitmane, head of equity research at State Street, said the market was “overreacting” to the MIT report. “The fundamental story in the [tech] sector is still strong. I don’t think the MIT report really changes that story.”
But others argued the paper had crystallised concerns about how drastically AI might boost economic productivity, hastening a rotation out of expensive tech names into previously unloved sectors expected to benefit from lower interest rates.
The market is pricing in a roughly 85 per cent probability that the Federal Reserve lowers rates by 0.25 percentage points at its September meeting. Investors are also keenly awaiting comments from Fed chair Jay Powell at the central bank’s symposium at Jackson Hole on Friday.
Brian Culpepper, president of James Investment Research, said: “If investors are trying to increase allocations to [those other sectors], they may take profit on those AI stocks that have done so well.”
Nvidia, the world’s largest listed company with a market capitalisation of more than $4tn, reports its earnings next week.
“If Nvidia comes out with blowout numbers next week, we’re away again,” Birrell of Premier Miton said. “It’s unsurprising that everyone’s a bit nervous ahead of that.”
Other global technology stocks also dropped after Tuesday’s sell-off in the US.
Taiwan Semiconductor Manufacturing lost 4.2 per cent on Wednesday. In Europe, Infineon shed 1.6 per cent and German software maker SAP was down 1.3 per cent.
