Stock market continues to fade as investors hedge against AI hype

Courtesy: CBS

The U.S. stock market sank sharply in early trading, with investors increasingly skittish about the strength of the artificial intelligence boom.

The S&P 500, which set a record high in late October, fell 78 points, or 1.2%, to 6,594 roughly an hour into Tuesday’s session. The Dow Jones Industrial Average and tech-heavy Nasdaq Composite dropped 1.2% and 1.6%, respectively.

The S&P 500 remains up more than 12% this year, the Dow has added 8% and the Nasdaq has risen more than 15%.

AI pioneer Nvidia was again the heaviest weight on the market. The chipmaker’s drop of 3.2% brought its loss for the month to nearly 11%, putting it in “correction” territory, or when a stock falls at least 10% from its previous high. The company is scheduled to report is third-quarter financial results on Wednesday.

“Stocks are extending their losses so far on [Tuesday] as sentiment stays downbeat and investors continue to dial back on tech exposure,” market analyst Adam Crisafulli of Vital Knowledge said in a research note.

What Nvidia does matters disproportionately to investors because it’s the most influential stock on Wall Street. It can almost single-handedly steer the direction of the S&P 500 on some days because of its immense size, after fervent demand for its AI chips helped it briefly top $5 trillion in total value. The S&P 500 sits at the heart of many investors’ 401(k) accounts.

“The boost AI has given to the U.S. stock market since the launch of ChatGPT has been so strong that the S&P 500 would currently be closer to 5,000 without it,” John Higgins, chief markets economist with Capital Economics, said in a note to investors. “It’s therefore hardly surprising that investors are preoccupied with whether the gains racked up by titans in the sectors at the heart of this transformative technology can be sustained.”

Nvidia’s and the U.S. stock market’s struggles are a sharp turnaround from months of relentless rallying since April, when Wall Street sold off after President Donald Trump shocked the world with stiff tariffs.

That rally, though, was so strong that critics said it may have carried stock prices too high, too fast and left the market at risk of a sharp drop. They pointed in particular to stocks swept up in the mania around AI.

Despite Wall Street’s recent stumble, many big investors expect stocks to recover, according to the latest monthly survey of global fund managers by Bank of America Global Research. But when asked what the No. 1 risk for the market is, one with a lower probability of happening but a high chance of damage, 45% pointed to an AI bubble. That beat out trouble in the bond market, inflation and trade wars.

The highest net percentage of investors in 20 years is also saying companies are “overinvesting,” according to the survey. The worry is that all the investment pouring into AI chips and data centers worldwide may not produce the kind of revolution that proponents have been predicting, or at least not as profitable a one.

Other high-flying areas of the market with their own evangelists have also been struggling lately. Bitcoin’s price briefly fell below $90,000 during the morning, down from nearly $125,000 last month.

Elsewhere on Wall Street, Cloudflare fell 3.1% after an issue at the internet infrastructure provider caused global outages for ChatGPT and other services.

In the bond market, Treasury yields eased. The yield on the 10-year Treasury sank to 4.09% from 4.13% late Monday.