AsianFin -- The U.S. stock market suffered its most dramatic intraday reversal since April on Thursday, with the S&P 500 Index plunging 1.6% after rising as much as 1.9% in morning trading, wiping out more than $2.7 trillion in equity market value. The selloff came despite Nvidia Corp.'s better-than-expected earnings, as investors' concerns about the sustainability of artificial intelligence (AI) spending and elevated stock valuations overwhelmed initial optimism about the chipmaker's blockbuster results.
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Nvidia shares, which initially climbed as much as 5% following the company's forecast of $65 billion in the January quarter revenue —roughly $3 billion above analysts' estimates—reversed course to close down 3.2%. The stock's intraday swing erased nearly $400 billion from its market capitalization, dragging the Nasdaq-100 Index down 2.4% and widening its decline from an Oct. 29 record to 7.9%.
The selloff hit hardest in the riskiest corners of the market. A Goldman Sachs Group Inc. index of profitless technology firms lost 3.7%, while a gauge of the most shorted stocks declined 3.5%. The VIX Index, an options-based measure of expected volatility, closed above 26 for the first time since April, while a gauge of expected volatility in the Nasdaq-100 rose above 32.
The reversal left bewildered traders searching for explanations, with theories ranging from resurfacing AI bubble concerns to worries that a strong September jobs report—released with a delay—signals the Federal Reserve is done cutting interest rates this year. Bitcoin's drop to a six-month low and Friday's options expiration also contributed to the rout.
Wall Street Questions AI Spending Sustainability
Despite Nvidia reporting its third fiscal quarter revenue of $57billion and earnings per share (EPS) of $1.30—both topping analyst estimates—market participants expressed doubts about whether AI investments can justify current valuations.
"Nvidia needs to be placed in the context of all the questions that are simmering in the nearer term," said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company. "There are many unanswered economic and equity market questions out there that investors are now debating," including concerns about the sustainability of AI, equity valuations, and pullbacks in unprofitable tech stocks.
Matt Maley, chief market strategist at Miller Tabak + Co. LLC, highlighted the core concern: "Is AI going to be as profitable as the market is pricing in? That's the key question. Traders are worried about whether AI investments today would be profitable in five years."
Nvidia's results"while positive, weren't enough to dispel doubts around whether valuations had gotten too rich and whether the recent move towards debt-based financing meant the investment levels were too aggressive without enough focus on shareholder returns," commented Sameer Samana, head of global equities for Wells Fargo Investment Institute.
Nvidia Revenue Outlook Fails to Calm Nerves
Nvidia CEO Jensen Huang had said last month that Nvidia has more than $500 billion of revenue coming over the next few quarters,with Chief Financial Officer (CFO) Colette Kress indicating on Wednesday′ s call that the company would likely eclipse that target. "There′s definitely an opportunity for us to have more on top of the $500 billion that we announced," Kress said. "The number will grow."
However, investors appeared unmoved by the upbeat guidance. Nvidia's main data center unit delivered revenue of $51.2 billion for the quarter ended on October 26, compared with an average Wall Street estimates of $49.3 billion polled by Bloomberg. Yet concerns about U.S. export restrictions to China—where Nvidia projects zero sales from AI accelerators—and questions about the structure of mega-deals with customers like OpenAI and Anthropic PBC continued to weigh on sentiment.
"There's been a lot of talk about an AI bubble," Huang acknowledged on the conference call. "From our vantage point, we see something very different." the CEO emphasized that investments in AI have begun to pay off and that demand for Nvidia's products would remain strong as the technology expands into the physical world through robots and other devices.
Broader Market Deteriorates on Multiple Fronts
The selloff on Thursday extended well beyond Nvidia, with Tesla Inc., Alphabet Inc., Apple Inc., Microsoft Corp., Broadcom Inc. and Amazon.com Inc. each experiencing swings of more than $100 billion in their valuations. AI-related stocks that initially gained on Nvidia's results—including CoreWeave Inc., which rose 10% at the open—reversed sharply, with CoreWeave closing down 7.6%. Advanced Micro Devices Inc. dropped nearly 8% after initially rising 4%.
Steve Sosnick, chief strategist at Interactive Brokers Group Inc., noted the influence of risk-off signals from other markets: "One of the things I'm watching right now is Bitcoin back to flirting with $90,000 because, like it or not, it's become a real proxy for risk tolerance overall among investors."
The S&P 500 has now declined more than 5% from its October record and fell below its 100-day moving average for the first time since February, closing at its lowest level since September 11. Susquehanna International Group’s co head of derivative strategy Chris Murphy warned that systematic strategies remain vulnerable: "With Nvidia earnings now behind us and the Fed unlikely to cut in December, investors are left questioning what remains to drive a year-end rally."
