The Australian stock market has plunged to its lowest point since May, following a tumultuous session on Wall Street that left investors unnerved.

By midday, the S&P/ASX200 had dropped by 103.5 points, or 1.21%, settling at 8,449.2. Simultaneously, the broader All Ordinaries index experienced a decline of 113.9 points, or 1.29%, bringing it down to 8,720.1.

This downward trend mirrored a challenging session in the United States overnight, where even strong earnings reports from major companies couldn’t dispel concerns over inflated stock valuations.

Initially, the S&P 500 seemed poised for a spectacular day, jumping 1.9% in early trading. However, it couldn’t sustain the momentum and ultimately reversed course, falling by as much as 1.3%.

The most significant declines were seen in sectors that had recently been market darlings. Nvidia, cryptocurrencies, and other high-flying investments, which had experienced rapid gains as traders scrambled to capitalize on their growth, led the downturn. Bitcoin, for instance, dipped below $87,000, a sharp fall from its nearly $125,000 value just a month prior.

Investor sentiment had been fragile leading into Thursday, largely due to two primary concerns: the possibility that Nvidia and other tech giants had become overvalued amidst the artificial intelligence boom, and the likelihood that the Federal Reserve might have concluded its series of interest rate reductions, which have been favored by Wall Street.

Nvidia jumped to an early gain of 5% but then dropped to a loss of 3.2%. Because it’s the biggest company in the U.S. market by value, Nvidia’s stock has more pull on the S&P 500 than any other company’s. 

‘An ugly reversal lower for US equities overnight, erasing the relief rally that followed Nvidia earnings report yesterday morning,’ IG market analyst Tony Sycamore said.

Worries about a potential AI bubble aren’t gone

‘The reversal was triggered by several factors: the mixed September jobs report failed to revive hopes of a December Fed rate cut; Nvidia’s earnings results failed to quell unease about stretched tech valuations; crypto assets extended their sharp decline.’

Despite Nvidia’s big numbers, worries about a potential AI bubble aren’t gone. The concern among investors is that all the dollars pouring into AI chips and data centers may not ultimately produce the big profits and productivity for the economy that proponents have been promising. 

Nvidia expects to sell another $65 billion of chips in the coming three months, which is more than analysts expected. But will all those chips create much bigger profits for Amazon and other companies using them? They still need to prove all the investment is worth it.

The most recent survey of global fund managers by Bank of America showed a record percentage of investors saying companies are ‘overinvesting.’ That helped make a potential AI bubble the No. 1 risk that they saw for the market, one with a lower probability of happening but a chance of very big damage.

Amazon went from an early gain of 2.1% Thursday to a loss of 2.5%. Palantir Technologies swung from a jump of 5.5% to a loss of 5.8%. 

Meanwhile all 11 local sectors were in the red by midday, led by a 3.3 per cent plummet in raw materials stocks as investors mulled their expectations for global growth.

Iron ore giants BHP, Rio Tinto and Fortescue each dropped more than two per cent, while gold stocks were a sea of red as the precious metal consolidated around $US4,065 ($A6,300) an ounce.

Rare earth elements and critical minerals plays, along with copper miners, were hammered amid renewed investor fears about whether the artificial intelligence boom would prove to be a bubble.

Australia’s tech sector fell 0.9 per cent

The heavyweight financial sector edged 0.6 per cent lower, with all big four banks and Macquarie Group selling off, led by a 1.5 per cent drop in Westpac.

Energy stocks tumbled 1.7 per cent, tracking with a fall in oil prices overnight and weighing on Woodside and Santos.

Coal producers were under pressure, with Yancoal and Whitehaven each down more than 2.3 per cent, while uranium plays like Paladin and Deep Yellow tumbled more than 4.9 per cent.

Australia’s tech sector fell 0.9 per cent, with segment giant WiseTech Global acting as a ballast, up 4.4 per cent after its board reassured shareholders and touted strong growth at its annual meeting.

Elsewhere in IT, data centre play NextDC and software-as-a-service provider Technology One tumbled more than three per cent.

The shift in sentiment also hit real estate stocks, which dropped 1.2 per cent in a broad-based decline.

Consumer-facing stocks performed better than most, with staples and discretionaries slipping less than 0.5 per cent, while the defensive healthcare sector posted the slightest loss, down 0.3 per cent.

The Australian dollar was buying 64.55 US cents, down from 64.79 US cents on Thursday at 5pm, and looks stable for now after dropping to three-month lows overnight.