Nasdaq Tumbles as AI Optimism Dims, $1 Trillion Wiped Out

The Nasdaq 100 Index suffered a $1 trillion loss on Wednesday as investors reevaluated the potential returns on artificial intelligence investments.

The selloff, the worst since October 2022, was led by key AI-related stocks, raising concerns about the technology’s immediate financial benefits.

Shares of semiconductor giants like Nvidia Corp., Broadcom Inc., and Arm Holdings Plc were hit hard, each experiencing significant declines.

Nvidia, a leader in AI chip technology, fell by 6.8%, while Broadcom lost 7.6%.

The downturn was sparked by Alphabet Inc.’s earnings report, which revealed high capital expenditures without the expected returns, causing its stock to drop over 5%.

Tesla Inc. also contributed to the market’s woes, plunging more than 12% as CEO Elon Musk provided limited updates on the company’s self-driving vehicle projects.

Alec Young, chief investment strategist at Mapsignals, highlighted the overarching worry: “The ROI on all the AI infrastructure spending remains unclear. There’s massive investment, but the payoff is proving elusive.”

This sentiment echoed throughout Wall Street, fueling fears of an AI bubble.

The tech sector’s volatility was further underscored by increased options trading. Nvidia saw its highest options volatility since March, with a notable rise in demand for protective puts on Broadcom Inc. This reflected traders’ concerns over future price swings.

This selloff comes just weeks after a shift from tech stocks to smaller companies expected to benefit from potential Federal Reserve rate cuts.

The Russell 2000 outperformed larger indices, gaining 0.5% this week compared to a 2.6% loss in the Nasdaq 100.

Jim Covello of Goldman Sachs Group Inc. voiced skepticism about the commercial viability of AI, questioning whether the immense spending on AI infrastructure would pay off.

This apprehension was echoed in derivatives markets, where demand for bearish options in tech stocks surged.

Tech valuations have reached historically high levels, with Nvidia trading at 36 times projected earnings, compared to the S&P 500 average of 21.

As tech giants brace for slower profit growth, the stakes for upcoming earnings reports are high.

While Alphabet’s results have dimmed immediate expectations for AI contributions, the market is closely watching upcoming reports from Microsoft, Meta Platforms, Apple, and Amazon. Nvidia, the biggest beneficiary of AI spending, will report later in August.

Cayla Seder, a strategist at State Street, remains cautiously optimistic: “Despite current trepidation, large-cap tech stocks continue to offer attractive growth potential.”