On Jul 24, 2024 the Nasdaq 100 Index experienced a significant downturn, shedding more than 3%, marking its worst day since October 2022. The selloff led to a $1-trillion rout in the Nasdaq 100 Index and was triggered by artificial intelligence (AI) technology leaders, including semiconductor giants like Nvidia Corp. NVDA (down 6.8%), Broadcom Inc. AVGO (declined 7.6%), Super Micro Computer Inc. SMCI (dropped 9.15%) and Arm Holdings Plc ARM (down 8.2%).
The downturn was also caused by Alphabet Inc.'s GOOGL earnings report, which highlighted increased capital expenses, leading to a more than 5% drop in Alphabet stock. Tesla Inc. TSLA also plunged more than 12% following a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts.
Against this backdrop, inverse Nasdaq ETFs like ProShares UltraPro Short QQQ SQQQ, ProShares Short QQQ PSQ and ProShares UltraShort QQQ QID have gained materially. SQQQ ETF was up 10.8% on Jul 24, PSQ rose 3.6% and QID ETF grew 7.2% on Jul 25. Direxion Daily Technology Bear 3x Shares ETF TECS was up 12%. ProShares Short S&P500 ETF SH moved down 2.4% as the S&P 500 has considerable exposure to tech stocks.
Investor Sentiment
Investors expressed concerns over the return on investment from substantial AI infrastructure spending. Alec Young, chief investment strategist at Mapsignals, noted that despite massive investments, the payoff may take longer than expected, impacting short-term earnings for tech giants, as quoted on Bloomberg.
Bloomberg index of the so-called Magnificent Seven technology stocks went down 5.9% on Jul 24, falling below its average price for the past 50 days for the first time since May. However, it has gained 33% since the start of the year.
Reflecting high market uncertainty, options volatility for Nvidia surged to its highest level since mid-March. Meanwhile, demand for puts on Broadcom reached a three-month peak, underscoring investor caution amid the tech selloff.
AI Bubble Speculations
Speculation about an AI bubble added to market jitters, fueled by concerns that the commercial potential of AI may be overestimated, according to market professionals, including Jim Covello from Goldman Sachs. There are also concerns going around related to the profitability of AI investments amid high infrastructure costs.
Valuation Concerns
There is no doubt that tech stock valuations, which had reached historically high levels, contributed to the downturn. Despite the recent correction, many tech giants like Nvidia, Apple and Microsoft remain priced at elevated multiples, raising the stakes for upcoming earnings reports.
Investors seem to be paying attention to increasing concerns from some Wall Street circles that the AI rally, which has injected $9 trillion in value to the S&P 500 over the past year, might collapse soon. Although Wednesday's crash may not signal the beginning of such a downturn, the scale of the decline indicates fear among investors.
Nvidia is priced at 36 times profits projected over the next 12 months compared with an average of 21 for the S&P 500. Apple and Microsoft are both priced at more than 30 times. The valuation is even more alarming, with profit growth for the tech giants poised to slow, per a Bloomberg article, published on Yahoo Finance.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
