AI trade is taking a hit on Tuesday.
The sell-off in high-growth tech stocks accelerated in late trading, with major indexes falling on concerns that valuations could reach unsustainable levels.
Despite strong results and a positive outlook, concerns about the stock’s valuation intensified on Tuesday after Palantir stock fell following its third-quarter earnings report. The AI software giant beat expectations over the past three months, earning $1.18 billion in revenue, above expectations of $1.09 billion.
However, the stock price fell by 9%. Other leaders in the AI industry also sold off en masse, with the tech-heavy Nasdaq 100 dropping nearly 2%. The yield on the 10-year US Treasury note fell 2 basis points to hover around 4.08%.
Here are the positions of the major indexes as of 3pm ET on Tuesday:
S&P500: 6,771.90, down 1.17%
Dow Jones Industrial Average: 47,029.06, 0.65% decrease (-307.62 points)
Nasdaq Composite: 23,379.36, down 1.91%
Other big tech stocks selling on Tuesday included:
Questions are swirling about whether valuations are rising too quickly for some companies and whether companies will be able to realize their AI ambitions after spending billions on the technology.
Palantir’s forward price/earnings ratio was hovering around 240 times as of Tuesday morning. By comparison, NVIDIA’s forward price/earnings ratio is approximately 29 times.
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Comments from bank executives on Tuesday that said the risks of a market correction were rising also weighed on sentiment. Morgan Stanley CEO Ted Pick and Goldman Sachs CEO David Solomon both pointed to the risk that the market could correct by as much as 20%. But Pick added that he doesn’t necessarily see this as a negative event.
“We should also welcome the possibility of a drawdown, a 10-15% drawdown, that is not caused by some kind of macro cliff effect,” he said at the Global Financial Leaders Investment Summit in Hong Kong.
JPMorgan’s Market Intelligence Desk wrote in a note Tuesday that the market is also uncertain about the return on investment in AI so far. Analysts said clients were concerned about the narrowness of the market, adding: “The tone of risk is misaligned globally.”
The endless hype surrounding the technology itself may be starting to wane.
“Some doubt whether AI will live up to the hype in terms of future returns,” David Morrison, senior market analyst at Trade Nation, wrote in a note about Tuesday’s selloff.
AI trade has raised other red flags in recent weeks. Shares in Meta and Microsoft fell sharply after the companies announced they would expand their capital spending plans, a sign that investors are increasingly skeptical of the large amounts of money being poured into AI.
Meanwhile, “Big Short” investor Michael Burry recently revealed his bets on Palantir and Nvidia on Monday, increasing selling pressure in the tech sector.
This isn’t the first round of volatility for Palantir, which has plunged about 40% since April from its peak at the beginning of the year amid a broader market selloff. The stock fell another 18% from mid-August to September lows after short seller Andrew Left said he was betting on the company.
All of this is happening at a time when the market is starting to wake up to the reality that further rate cuts may not be a certainty. Jerome Powell said exactly that at last week’s October Fed meeting, but the outlook is cloudy, especially as the government shutdown forces markets to operate in a data blackout.
