A sell-off in the world’s largest technology companies drove stocks toward their longest slide since August, underscoring the American market’s narrow reliance on a handful of growth giants.
While the S&P 500 came well off session lows, it was down for a fourth straight day. Ahead of Nvidia Corp.’s results, the shares sank 1.7%. The bar keeps getting higher for the chipmaker to convince investors that the billions of dollars spent on artificial intelligence will pay off. Its outlook could have significant implications due to the firm’s massive influence on major indexes.
Pressure is rising on financial markets more broadly as investors reassess the outlook for economic growth at a time when tech behemoths continue to spend heavily on AI. Microsoft Corp. and Nvidia are committing to invest up to a combined $15 billion in Anthropic PBC, in a move that ties the AI developer closer to two of the biggest backers for its rival OpenAI.
Wall Street has grown increasingly concerned that AI isn’t yet generating enough revenue or profits to justify the massive spending on new infrastructure. Valuations in the booming industry are due for a reassessment, according to JPMorgan Chase & Co. Vice Chairman Daniel Pinto.
“There is probably a correction there,” Pinto said at the Bloomberg Africa Business Summit in Johannesburg on Tuesday. “That correction will also create a correction in the rest of the segment, the S&P and in the industry.”
Investors’ cash positions dropped below a critical threshold in a monthly Bank of America Corp. survey, triggering a so-called sell signal for equities. With investor exposure to equities still the highest since February in the BofA survey, strategist Michael Hartnett said the market would “correct further” without a rate reduction next month.
Positioning is now “a headwind, not tailwind for risk assets,” he noted.
About 300 shares in the S&P 500 rose, but the index dropped to around 6,650, pushing a slide from its Oct. 28 record to 3.5%. A gauge of tech megacaps lost 1%. A closely watched index of stock volatility — the VIX — hovered near 23.
Bitcoin rebounded after briefly dropping below $90,000. The yield on 10-year Treasuries slid two basis points to 4.12%. The dollar wavered.
“Market correction continues,” said Louis Navellier at Navellier & Associates. While the slide was technically overdue, he says the leverage of the correction was amplified by the extreme weight of mega tech and the fear of an AI bubble.
“Fortunately, earnings are holding up very well; no one questions that AI holds the promise for huge gains in productivity,” noted the Wall Street veteran. The uncertainty is centred around the timing of when the productivity will ramp and where and how the profits will be made.”
The bull case for generative AI is no longer clear and hyperscalers should be approached with caution, according to an analyst who downgraded two of Wall Street’s most-favoured tech giants.
Microsoft Corp. and Amazon.com Inc. saw their ratings cut to neutral from buy on Tuesday, as Rothschild & Co Redburn’s Alexander Haissl downgraded the stocks for the first time since initiating coverage in June 2022, according to data compiled by Bloomberg.
“We disagree with the AI bubble narrative, as most of the spending comes from deep-pocketed incumbents, not leveraged startups,” said Harriet Smith at HSBC.
Nvidia, on a stand-alone basis, has grown larger than the energy, materials, and real-estate sectors combined and depending on the day, it even exceeds the combined weight including the utilities sector, according to Ryan Grabinski at Strategas. It’s also bigger than the entire industrials sector.
“So calling tomorrow’s earnings report ‘important’ is almost an understatement,” Grabinski said. “The outcome is likely to send ripple effects through both US and international markets. Although expectations for AI more broadly have cooled in recent weeks, this report has the potential to shift sentiment back to optimism. That said, the bar is undeniably high right now.”
“While we continue to monitor the pace and scale of debt-funded AI capex against revenue and earnings growth, we maintain our positive view on AI’s structural growth story, which should drive further equity performance,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.
Participation in transformative trends is often essential for long-term wealth preservation and appreciation, and she believes under-allocated investors should add exposure.
The fact that Nvidia’s stock has experienced a brief reset in recent days heading into its earnings report Wednesday means the stock now has a slightly lower bar to clear post-earnings, according to James Demmert at Main Street Research.
“We expect Nvidia to exceed estimates and provide future earnings and revenue guidance that is higher than investors expect,” he said. “It’s unlikely that Nvidia has seen any slowdown in demand for its products, even with increased competition, given how early we are in the AI cycle.”
Nvidia’s earnings on Wednesday are particularly important given the rising skepticism regarding the longevity of the AI cycle and current AI stock valuations, Demmert noted. Valuations, while expensive, still trade at discounts to earnings growth rates and overall AI market sentiment is mildly bullish and not euphoric, he said.
“The stock market’s recent pullback is a natural reset for a market that had very little volatility in recent months,” he noted. “While it’s unusual to see a market pullback in November, it’s setting us up nicely for a strong December and year-end. We are still very early in the business and AI cycle.”
While Nvidia remains a bellwether for chip demand, the other major AI hyperscalers have already confirmed a powerful feedback loop between cloud revenues, free cash flow, and renewed capex intentions, noted Lauren Goodwin at New York Life Investments.
To Kyle Rodda at Capital.com, the drop in equity prices is a function of positioning, risk aversion and momentum.
That is: de-risking ahead of US jobs data and Nvidia’s earnings, which will inform expectations about the outlook for US interest rates and the profitability of the Magnificent Seven, he said.
“We believe the door is now open for a deeper pull/correction, and the six-month winning streak in equities to end,” said Craig Johnson at Piper Sandler. “Investors should remain cautious but be prepared to take advantage of a deeper pullback in coming months.”
Meantime, stock traders across Wall Street are set to turn in their best year for revenue in at least two decades after clients piled into booming AI stocks in recent months.
The industry’s fee pool is expected to reach $94 billion this year, according to data compiled by Crisil Coalition Greenwich. That would be an 18% increase from 2024, the consultancy found.
“Concerns over the tech sector are weighing on stock prices, although investors are also having to price out the prospect of another rate cut from the Fed next month,” noted David Morrison at Trade Nation.
A faction of Federal Reserve policymakers has stepped up warnings that inflation progress could slow or stall, casting doubt over the prospects for another interest-rate cut in December and laying bare a deepening divide at the central bank.
Officials broadly agree the labour market has cooled, but are split over whether the slowdown will intensify. And while one group is sanguine about price pressures, others are warning interest rates at the current level are barely restraining the economy and see further cuts putting progress on inflation at risk.
“This has led many to favour no change in the Fed Funds rate after next month’s meeting, which means the removal of a strong tailwind for equity markets,” noted Morrison.
Fed Bank of Richmond President Tom Barkin offered an optimistic inflation outlook, while suggesting the labour market may be weaker than available data signal. He didn’t offer any clues on whether he’ll support another rate cut when Fed officials next meet Dec. 9-10, saying there is a lot to learn between now and then.
On the economic front, US homebuilders’ confidence barely rose this month. The Labor Department website showed initial applications for jobless benefits totalled 232,000 in the week ended Oct. 18 — roughly in line with the level of claims in mid-September. US companies shed 2,500 jobs per week on average in the four weeks ended Nov. 1, according to ADP Research.
The ADP snapshot of the labour market has helped bridge the gap with official employment data delayed by the longest government shutdown in history. While funding to official statistics agencies has been restored, it’s still unclear when October economic data will be issued.
U.S. Economic Data Releases Delayed by Government Shutdown (Table)
Corporate Highlights:
- Meta Platforms Inc. won a key lawsuit Tuesday after a federal judge ruled that the company’s acquisitions of the photo-sharing app Instagram and messaging service WhatsApp don’t violate US antitrust law.
- Meta Chief Revenue Officer John Hegeman is leaving the social networking leader, one of several leadership changes at a company under pressure to deliver on a costly AI strategy.
- Apple Inc.’s iPhone 17 series drove a 37% rise in its monthly smartphone sales in China, signalling strong momentum in a key market.
- Alphabet Inc.’s Google debuted an updated version of its artificial intelligence model, Gemini, that executives said represents a “massive jump” in reasoning and coding ability.
- Alphabet was upgraded to buy from hold at Loop Capital, the latest example of how Wall Street is turning even more positive on the Google parent.
- Intuit Inc. will spend more than $100 million on a multi-year contract with OpenAI to further weave the ChatGPT maker’s artificial intelligence models into financial apps like TurboTax.
- Billionaire Bill Ackman said now isn’t the right time for the Treasury to sell its shares of the government-sponsored mortgage giants known as Fannie Mae and Freddie Mac.
- Home Depot Inc. cut its full-year earnings guidance, warning that some unsteady consumers are hitting the pause button on big-ticket home purchases.
- Kroger Co. said it would close some e-commerce fulfilment centres and expand partnerships with delivery companies, a shift in its digital strategy.
- Pfizer Inc. is seeking to raise at least $5 billion through a U.S. dollar corporate bond offering that will help fund its acquisition of Metsera Inc., according to people with knowledge of the matter.
- Klarna Group Plc reported record revenue that beat estimates for its third quarter, while setting aside more provisions for credit losses, in its first set of earnings since going public.
- Klarna has agreed to sell as much as $6.5 billion of its longer-term loans to funds controlled by Elliott Investment Management as part of the fintech’s push to free up capital in order to expand further in the US.
- ExxonMobil Corp. plans to close its Mosmorran chemicals plant in south Scotland, citing a UK economic and policy environment that makes the operation uncompetitive.
- Freeport-McMoRan Inc. laid out a restart schedule for its sprawling Indonesian copper mine after a deadly mudslide in September, delivering greater clarity to investors on it most lucrative asset.
- Activist investor Elliott Investment Management LP has taken a large stake in Barrick Mining Corp., according to people familiar with the matter, after operational problems and cost blowouts left the gold producer trailing its peers while bullion prices surged
- Topgolf Callaway Brands Corp. has agreed to sell a 60% stake in its Topgolf and Toptracer business to private equity firm Leonard Green & Partners LP in a deal that values the business at about $1.1 billion.
- Airbus SE managed a comeback on the second day of the Dubai Air Show, reeling in deals with local carriers Etihad Airways and Flydubai and an accord for its A350 wide-body model from Air Europa.
- Akzo Nobel NV agreed to acquire smaller rival paint maker Axalta Coating Systems Ltd. in a deal that will create a US-listed leader with combined annual sales of almost $17 billion.
- Rheinmetall AG is aiming for annual sales of about €50 billion by 2030, towards the higher end of previous projections, chief executive officer Armin Papperger told analysts in a capital markets day call on Tuesday.
- Ocado Group PLC’s shares slumped after its biggest customer, US grocer Kroger Co., said its automated warehouse network is falling short of financial expectations and announced the closure of three sites.
- Toyota Motor Corp. detailed plans to invest $912 million to increase output of hybrid components and vehicles across five states, part of a broader $10 billion commitment in the US over the next five years.
- Baidu Inc. posted its biggest quarterly revenue slide on record, highlighting a weakening advertising business while it tries to keep up in the artificial intelligence race.
- PDD Holdings Inc. warned of a slowdown in an intensively competitive Chinese consumption environment, reflecting an escalating battle in online commerce with sector leaders such as Alibaba Group Holding Ltd.
- Xiaomi Corp. expects a shortfall in memory chips to push up mobile device prices next year, joining a growing number of companies in warning of a potential supply crunch of the critical component in 2026.
What Bloomberg Strategists say…
“The slide coincides with Nvidia’s decline toward $180, which has served as a floor for the stock since September. Given the tech giant’s hold over the broader market, it’s no surprise that it has become a make-or-break type of stock for US equities.” —Kristine Aquino, Macro Strategist, Markets Live. For the full analysis, click here.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.4% as of 2:25 p.m. New York time
- The Nasdaq 100 fell 0.7%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World Index fell 0.8%
- Bloomberg Magnificent 7 Total Return Index fell 1.1%
- The Russell 2000 Index rose 0.6%
- Nvidia fell 1.7%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1585
- The British pound was little changed at $1.3154
- The Japanese yen fell 0.2% to 155.54 per dollar
Cryptocurrencies
- Bitcoin rose 1.7% to $93,402.7
- Ether rose 5.1% to $3,158.96
Bonds
- The yield on 10-year Treasuries declined two basis points to 4.12%
- Germany’s 10-year yield was little changed at 2.71%
- Britain’s 10-year yield advanced two basis points to 4.55%
- The yield on 2-year Treasuries declined three basis points to 3.58%
- The yield on 30-year Treasuries was little changed at 4.74%
Commodities
- West Texas Intermediate crude rose 1.4% to $60.74 a barrel
- Spot gold rose 0.8% to $4,076.77 an ounce
