The three main stock indexes fell again on Tuesday, with Amazon, Microsoft and Nvidia leading the losses, as fears of an AI bubble apparently increased among economists and hopes for a new interest rate cut diminished.
Key data
The Dow Jones Industrial Average fell about 450 points (0.9%), the S&P 500 fell 0.5% and the tech-heavy Nasdaq fell 0.8% around noon ET on Tuesday.
The mega-capitalized Amazon and Microsoft fell 3.5% each, adding to the falls of Nvidia (2.8%), Meta (2.5%), Palantir (2.5%), Tesla (2.4%), Alphabet (1.8%), Broadcom (1%) and AMD (5.5%), which caused the decline of the Nasdaq.
Home Depot led widespread losses in the Dow Jones, with its shares falling 4.3% after announcing lower-than-expected results. Several banking stocks also posted declines, including Visa (1.8%), American Express (1.6%), JPMorgan Chase (0.7%) and Goldman Sachs (0.3%).
Why are tech stocks falling?
Bank of America, in a survey of global fund managers released Tuesday, revealed that the biggest perceived risk to markets is the potential bubble in AI stocks. There is concern about the overvaluation of some companies and their disconnection from their real value.
45% of investors surveyed by Bank of America considered an AI bubble to be the top risk, with most expressing concern about corporate overinvestment, the first since 2005. This was primarily due to “concerns about the magnitude and financing” of the AI boom, according to the bank.
About 53% of investors believe AI stocks are already in a bubble, down from a record 54% in October. Last week, stocks appeared to react to the White House’s announcement of the release of employment and inflation data for October and September, as economists expect inflation to remain high and the labor market likely to deteriorate further.
Also read: No company is immune if the AI bubble bursts, says Google CEO
Chances of another interest rate cut
According to CME FedWatch, there is now only a 50% chance that the Federal Reserve (Fed) will vote to lower interest rates another 25 basis points in December, well below the 90% in October.
Policymakers were cautious about lowering rates, with Fed Vice Chairman Philip Jefferson saying on Monday that the central bank would likely “proceed cautiously,” while Fed Governor Christopher Waller suggested they would lower rates again.
What to take into account
For months, Wall Street and tech executives wondered whether increased investments in AI overinflated stock values. A study published by MIT revealed that 95% of the 300 AI projects analyzed still do not generate profits, even after investing up to $40 billion in them.
Some economists compared the current market to the bursting of the dotcom bubble in 2000. Alphabet CEO Sundar Pichai told the BBC on Tuesday that while the growth of AI investments was an extraordinary moment, there is some irrationality inherent to this boom. Pichai noted that no company, including his own, would be immune if the AI bubble burst.
Several companies, including OpenAI, Microsoft and Nvidia, have announced multi-billion dollar deals and alliances in recent months, while OpenAI CEO Sam Altman projected his company would invest up to $1.4 trillion in developing the technology.
This article was originally published in Forbes US
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