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On Tuesday, U.S. technology stocks experienced a decline, prompted by growing fears that the intense excitement over artificial intelligence may be overestimated, impacting some of Wall Street’s most speculative firms.
The Nasdaq Composite, which is heavily concentrated with tech companies, ended the day down by 1.4%. Within this index, Palantir, a software company, saw its shares drop by 9.4%, and Arm Holdings, a chip manufacturer, experienced a 5% decline.
The decline marked the biggest one-day drop for the index since August 1. The blue-chip S&P 500 closed 0.7 per cent lower.
Some traders attributed the market’s dip to a report published on Monday by a division of the Massachusetts Institute of Technology. The report highlighted that “95% of organizations are not seeing any return” on their investments in generative AI, a technology that has recently been a key driver in pushing U.S. stock prices to new highs.
“The story is spooking people,” said one trader close to a multibillion-dollar US tech fund.
The report from MIT stated, “Only 5% of integrated AI projects are generating significant returns, while the majority are showing no discernible impacts on profit and loss.”
The stock drop also came days after OpenAI chief executive Sam Altman signalled that an AI bubble might be forming.
“Are investors over excited? My opinion is yes,” Altman told reporters this week.
An analyst commented, “I do believe some investors will face significant financial losses, which is unfortunate. There will be times of excessive enthusiasm. However, overall, the benefit to society will be substantial.”
Tuesday’s drop was notably fueled by declines in stocks that have performed exceptionally well this year. AppLovin, known for integrating ads within apps, fell by 5.9%. Nvidia, renowned for its advanced AI chips vital to many industries, decreased by 3.5%. Additionally, Oracle and Advanced Micro Devices, among the top five high-performing large-cap stocks since May, fell by 5.9% and 5.4%, respectively.
Bitcoin shed 2.7 per cent, driving falls in stocks linked to the digital token such as Strategy and Metaplanet.
“A lot of these were very crowded trades, so when there’s a move to the exit, things can get messy,” said Steve Sosnick, chief market strategist at Interactive Brokers, a platform widely used by individual investors.
Defensive parts of the market including consumer staples, utilities and real estate rose as tech slipped. About seven in 10 S&P 500 stocks ended the session higher.
Tech has driven the market’s recent run higher. The S&P 500 information and technology sub-index has risen 14 per cent since mid-May, led by AI-linked companies such as Oracle and AMD.
“It’s still a supportive macro environment. But, bottoms up, [some of the] frothy valuations are contradictory,” said Mark Giarelli at Morningstar.
Additional reporting by George Hammond in San Francisco
